Which airline stocks are ready to take off?
The pandemic has caused lasting damage to airlines. Ballooning debt and drastic cost cutting has left the sector in a precarious long-term position. However, with travel restrictions easing its worth taking stock of the industry to see who looks ready to pounce on a potential summer season. This article isn't personal advice. If you're not sure if an investment is right for you, ask for advice. All investments can fall as well as rise in value, so you could get back less than you invest. Investing in individual companies isn't right for everyone  it's higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio. Playing the long game  IAG is the only long-haul carrier on this list, an unenviable position at the moment. Some of the short-haul carriers have been optimistic about an injection of passengers this summer. But rhetoric from IAG has been muted. Thats because long-haul is unlikely to spring back to life with the pandemic ongoing. The groups balance sheet wasnt in tip-top shape before the pandemic and its going to be severely damaged coming out the other side. At last check, net debt (readily available assets minus debt) stood at 9.7bn and is expected to rise and stay in the double digits in the years ahead. Thats in part because the groups income isnt expected to be back in the black this year. Analysts also dont see profits approaching pre-pandemic levels anytime in the next three years. Its going to be a long time before IAG has the firepower to make a meaningful dent in its debt obligations. With that said, IAG shares reflect these issues. The groups share price is still well below pre-pandemic levels. IAG share price  Past performance isnt a guide to the future. Source: Refinitiv, to 02/06/21  Investors are concerned that IAG wont be the same business when things return to normal, and frankly so are we. Management doesnt expect passenger volumes to return to 2019 levels until 2023 at the earliest. Leaning on cost cutting and capacity reduction for that long is going to leave permanent scars at an operational level  the group might not be able to spring into action as nimbly as some of its peers when travel does resume. Cheap and cheerful  Ryanair has long been known as Europes bare-bones, low-cost airline. Thats served it well up until the pandemic. But despite the groups enviable financial position and familiarity with cost cutting, even the most efficient operation cant make money with planes on the ground. Not only did Ryanair report its first full-year underlying loss in more than a decade this spring, but the year-long disruption meant Ryanairs net debt position increased more than fivefold to 2.3bn. However, if a summer travel season materialises in July and August, Ryanair believes itll be enough to breakeven for the financial year. If thats the case, the past year might not be more than a blip on the radar for Ryanair. Management has pressed ahead with plans to expand its fleet, taking advantage of the Covid disruptions to secure additional discounts on the price of new planes. Its also capitalising on the demise of its rivals to add new routes to its network. It seems investors are banking on this eventuality as well. Ryanairs share price has risen back to pre-pandemic levels. The groups Price-to-Book ratio, which tells us how much investors are willing to pay for the business as a sum-of-its-parts, is well ahead of the 10-year average. Ryanair share price  Past performance isnt a guide to the future. Source: Refinitiv, to 02/06/21  But were hesitant to break out the 7 glasses of prosecco just yet. Even if summer travel resumes, theres no guarantee that pandemic-weathered travellers will be squashing onto Ryanairs planes. Over the past year passengers have been more willing to pay for extra space. This could see some of the groups usual customers look elsewhere for more personal space. Plus, only routes to green-listed countries are likely to see a spike in demand. For now, the list is limited and doesnt include any of Ryanairs current routes. Easy to miss  Ryanair isnt the only low-cost provider chomping at the bit this summer travel season, easyJet is in a similar position. Like Ryanair, the groups debt position has got a lot worse. Until 2019, easyJets cash outweighed its debt obligations every year since 2013. The decline in air travel saw the group swing to a loss in 2020, and another loss is expected for the financial year ending in September. However, beyond that things are seen normalising relatively quickly, with 2023 profits forecast to exceed 2019 levels. easyJets route network is its number one strength. Management was quick to adapt to changing travel restrictions and the group saw strong take up when it increased capacity to green list countries. Unlike Ryanair, easyJet focuses on high-traffic airports that offer limited slots. This means the groups airport and handling costs take a bigger bite out of revenue, but this could be a benefit in a world scarred by Covid. The additional public transport required to get to less-popular airlines could be off-putting, which would funnel more of the pent-up travel demand into easyJets planes. So far, investors arent convinced that easyJet will take off post-pandemic. The groups share price is still trading below its pre-pandemic highs and the price-to-book value is roughly in-line with the 10-year average. easyJet share price  Past performance isnt a guide to the future. Source: Refinitiv, to 02/06/21  We think this makes sense. easyJet took a conservative approach throughout the pandemic, keeping major strategy shifts and purchases to a minimum. That could be a good thing, if rolling travel restrictions persist. But if travel takes-off this summer and normalcy is around the corner, easyJet could find itself on the back foot having passed on potential growth opportunities in favour of security. The bottom line  Airlines are still in a precarious position. The vaccine rollout has been uneven across the globe, which has left passengers with limited options when it comes to international travel. Still, the beginnings of a recovery are present, particularly among short-haul carriers. Wed caution against blowing these glimmers of hope into anything more though. The sector still has a long way to go before the future is clear and were expecting a reasonable amount of turbulence along the way. One of HLs non-executive directors is also a non-executive director at easyJet. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information. Please Please log in to your account to automatically fill in the details below. Please select... Advert on another website Mobile application Existing client HL mention in the media HL mention on another website Recommendation from a friend Search Engine / Research Advert in the press Hargreaves Lansdown would like to contact you about the services we offer which may be of interest to you. We explain how we use your personal data in our Privacy Policy. Enter your full address. Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.