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EasyJet’s shares jumped after it reported Q3 results – will IAG follow suit?

EasyJet and IAG flights on the same runway

As international flight routes reopened and demand neared pre-pandemic levels, many traders and investors were hoping that airline companies like British Airways owner IAG [IAG] and easyJet [EZY] would make a grand recovery in 2022. However, staffing and capacity issues have resulted in the cancellation of thousands of flights, with threats of further disruption before the end of the busy summer period.

Against this backdrop, several carriers have released their quarterly earnings during the week commencing 25 July. Low-cost airline easyJet reported its Q3 earnings on Tuesday, while IAG is set to announce its results on Friday.

The past six months have been turbulent for airline stocks, which have struggled amid rising operating costs and rampant inflation. While travel demand has been higher than expected, with passengers desperate to get away despite the cost of living squeeze, staff cuts made during the pandemic shutdown have resulted in queues, delays and cancellations. Europe has been the worst hit. According to Bloomberg, 7,870 flights were cut in June from France, Germany, Italy, Spain and the UK – almost triple the number in June 2019.

IAG shares struggle amid travel disruptions

Heathrow Airport, British Airways’ main hub, has been the epicentre for a lot of the travel disruption, with staff threatening to strike over the busy July period. While the strikes were called off, the airport has been forced to place a cap on passenger numbers, which could last until October, stoking fears of further disruption to come.

As a result of these pressures the IAG share price is down approximately 25% year-to-date as of 27 July. Though it has risen from the 52-week low it hit on 12 July – the day that hundreds of British Airways staff working at Heathrow voted on strike action – the stock has plummeted 20% over the past three months alone, reversing any gains it made at the start of the year, when the company’s full-year 2021 results revealed improving passenger capacity and operating cash flow.

IAG’s Q1 earnings update in May underscored the recovery in demand, with capacity at 65% of 2019 levels, up from 58% in the previous quarter. Growth was particularly strong in the business travel segment, as well as premium leisure.

In the quarter ending 31 March, the company improved its loss per share from €21.60 in Q1 2021 to €15.90. It also significantly narrowed its operating loss, which came in at €731m, down 32.1% from €1.1bn in the year-ago quarter.

IAG stated in the first quarter update that it aims for its operating result (earnings before interest and taxes) to be profitable from the second quarter. However, with continued delays and disruption, it remains to be seen whether this target will be met. According to a consensus of 22 brokers polled by IAG, the airline is expected to see operating profits of €208m for Q2 2022.

Can easyJet keep up with rising passenger numbers?

EasyJet has also been under pressure, with significant disruption leading to the resignation of COO Peter Bellew earlier in July. Staff in Spain have also been striking this month in response to pay disputes, which is likely to lead to cancellations and delays. At the same time, inflation and rising fuel costs could further impact the company’s recovery.

“This year was supposed to be the year that airlines broke free from the problems of Covid-19... As far as easyJet’s stock is concerned it’s been anything but, with rising costs and significant travel disruption hindering the path to recovery, and the shares sliding to 10-year lows earlier this month,” Michael Hewson, chief market analyst at CMC Markets, said.

The easyJet share price is down by about 38% year-to-date as of 27 July, though it has recovered some of its losses since it reached a 52-week low on 5 July.

When easyJet reported its Q3 2022 trading update on Tuesday, it posted a headline loss before tax of £114m. Though this was down from £318m a year ago, it reported that staff shortages and disruption cost the company £133m in the June quarter.

Group revenue came in at £1.75bn, up from £213m in Q3 2021, while passenger revenue grew from £152m to £1.15bn over the same period. The airline has been boosted by strong growth in passenger numbers: 22 million passengers flew with easyJet in the quarter, representing 87% of 2019 capacity. For the fourth quarter, the airline’s schedule is 71% booked, which is one percentage point ahead of 2019 levels.

Although the results indicate robust demand, the question will be whether operational hurdles can be overcome to deliver the services promised.

Analysts have mixed forecasts for airline stocks

Despite the recent turbulence, analysts remain broadly optimistic on airline stocks this earnings season. According to 21 analysts polled by the Financial Times, easyJet has a consensus ‘outperform’ rating and a target price of 600p, representing a 60.7% upside on its 26 July closing price.

On 25 July, Morningstar named easyJet its ‘stock of the week’, noting that the myriad risks associated with airline stocks are already priced into the shares, “which are off nearly 40% this year”. In the view of analyst Joachim Kotze, easyJet is highly undervalued and its strong balance sheet should help it remain resilient through these short-term headwinds.

The IAG share price, meanwhile, received a consensus ‘hold’ rating from 16 analysts polled by the Financial Times. Its median price target of 153.92p implies a 36% upside on its last closing price. Ahead of its upcoming earnings announcement, in a research note on 18 July, UBS Group reiterated its ‘buy’ rating and target price of 180p on IAG stock, representing a potential upside of 59% on its 25 July closing price.

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