The airline sector has faced a barrage of headwinds over the last few years from volatile fuel prices to Brexit, global economic uncertainty, chaotic weather, competition and industrial action.
Since 2017 there has been a litany of collapsed airlines around the globe including Monarch, Wow Air, Primera Air, Cobalt and more recently Thomas Cook Airlines [TCG], XL Airways and Aigle Azur.
According to data from Refinitiv, the S&P 1200 Global Airlines Index has dropped 10.2% to 1304 in the last 12 months.
“The airline business is still in better health than it has been for many years, as high-profile failures and capacity discipline have helped to boost load factors and therefore profits,” Russ Mould, investment director at AJ Bell, told Opto. “But the combination of lofty profits, strong passenger growth, the development of regional airports and cheap financing has lured capacity into the market, just when the economic outlook is less certain and oil prices have advanced.”
“The airline business is still in better health than it has been for many years... but the combination of lofty profits, strong passenger growth, the development of regional airports and cheap financing has lured capacity into the market, just when the economic outlook is less certain and oil prices have advanced” - AJ Bell investment director Russ Mould
Here are three stocks that are steering an upward course through the headwinds.
Delta Airlines: premium passenger demand lifts revenues
Shares in Delta Airlines [DAL] hit an all-time high of $63.16 in July. Since the start of the year the price has risen more than 8% and currently trades at $54.35. Analyst consensus for the target price is $69.44.
The American airline recently revealed record quarterly revenues for Q2 up $1bn from the previous quarter to $12.5bn, and an earnings per share of $2.35, up 32% year-over-year.
The growth was driven by a 10% increase in premium ticket revenue demand and double-digit percentage increases in loyalty and third-party maintenance revenue. Revenues in Latin America grew 5% during the quarter mainly due to double-digit growth in the Brazil and Mexico markets.
Analysts expect third quarter revenue growth of 6% and an EPS of $2.26, up 30% from the same time last year, according to Seeking Alpha.
However, some analysts still harbour concerns. Daniel Martins, analyst and founder of DM Martins Research, said revenues could still be impacted by the travel disruptions caused by Hurricane Dorian and a softer Latin American market as a result of the strong US dollar and economic uncertainty in Europe.
“Delta's control of strategic hubs, such as Atlanta and its connectivity advantage in the eastern half of the country, seem to be providing it with access to higher-margin markets that its peers have been unable to tap into with the same level of success,” Martins wrote on Seeking Alpha. “As a result, it has the best occupancy rates in the industry.”
Despite these headwinds, Delta Airlines is being supported by strong domestic traffic buffered by healthy consumer spending. This could over the long-term make Delta a solid investment.
“Delta's control of strategic hubs, such as Atlanta and its connectivity advantage in the eastern half of the country, seem to be providing it with access to higher-margin markets that its peers have been unable to tap into with the same level of success” - DM Martins Research analyst and founder Daniel Martins
Wizz Air: beating off the competition
Shares in Europe’s largest low-cost airline carrier Wizz Air [WIZZ] have climbed steadily higher this year, rising 29% YTD to 3542p. The airline’s annual figures revealed a 4.5% hike in profits before tax to €300mn, leading the company to forecast €350mn for fiscal year 2020.
Annual revenues rose 19.6% year-over-year to €2.3bn with ancillary income, such as passengers reserving seats, doing particularly well. It has also been helped by higher fuel prices driving “weaker carriers” out of the market.
Its first quarter results carried on the momentum posting a record profit of 72.4million euros, 20% passenger growth and a 25% hike in revenues.
Rupert Hargreaves wrote recently in The Motley Fool: “Wizz has only been around for 10 years but it is already a force to be reckoned with. Since 2014, revenue has risen nearly 200% and net profit is up 234%. Wizz is trading at a forward P/E of 12.1 and PEG ratio of 0.5, which looks cheap compared to the firm’s projected growth rate. I think it could be worth adding this fast-growing airline to your portfolio.”
“Wizz has only been around for 10 years but it is already a force to be reckoned with” - Rupert Hargreaves
IAG: ready to win new business following Thomas Cook collapse
The share price of the British Airways owner International Consolidated Airlines [IAG] has dived more than 23% so far this year, from 618p in January to 450p now.
The group has been hit by British Airways industrial action, bad weather and rising fuel costs, prompting it to issue a profit warning. IAG warned that its full-year profit would be 6% lower, blaming a £121mn hit from recent pilot strikes and a £40mn blow from weaker bookings in its budget airlines: Vueling and Level.
The company expects its 2019 operating profit before exceptional items to be €215mn lower than 2018’s €3.49bn.
Despite the disruption and resulting chaos caused from the industrial dispute, there are still some positives. Another round of prospective strikes have been cancelled hinting at a possible resolution in the pilot wage dispute. The collapse of Thomas Cook is also likely to win market share for British Airways and it has already hinted that it will be looking to snap up its fallen peer’s Gatwick landing slots.
“IAG should be able to withstand the impact of the strikes. They're one offs after-all,” analysts Hargreaves Lansdown wrote in a note. “2018 profitability was boosted by low fuel prices, which has, in turn, led to healthy dividend increases and chunky share buybacks. The shares offer a prospective yield of 6%.”
The stock has been weighed down by the potential uncertainties ahead, giving it a quarterly price-to-book of 1.6.
“The PE ratio is just 4.6 times expected earnings. Both measures are well below the longer-term average,” added Hargreaves Lansdown. “That could look attractive to investors willing to stomach the macro risks.”
|PE ratio (TTM)||8.11||13.51||2.81|
|Quarterly Revenue Growth (YoY)||6.50%||24.90%||9.50%|
Delta, Wizz Air & IAG share price vitals, Yahoo Finance, 03 October 2019