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Can the airline industry take off again? – 3 share ideas Is there opportunity in the unloved airline industry? Here’s 3 share ideas.
Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
This article is more than 6 months old
It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.
The airline industry feels particularly unloved right now, and valuations are sitting at relatively low levels.
We think the underlying performance and outlook paints a brighter picture though.
Here’s three shares to look out for.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own. Yields are variable and not a reliable indicator of future income, no income is ever guaranteed. Tax rules can change and benefits depend on circumstances.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks . You should also make sure any shares you own are part of a diversified portfolio .
Prices delayed by at least 15 minutes
Airbus Airbus builds aircraft using thousands of parts from companies across the globe, so healthy supply chains are key to operations.
There are only two dominant players in the space, and we think Airbus is in first place against its biggest competitor, Boeing. High barriers to entry keep outside competition low, while recent high-profile and tragic incidents have caused Boeing long-lasting reputational damage.
The events at Boeing have seen airlines placing more orders with Airbus. That’s helped push Airbus' market share of narrow-body planes (think single-aisle aircraft) above 60%, and we see scope for potential further gains.
Airlines are upgrading their fleets after years of COVID-19 related underinvestment and orders keep coming in, pushing the backlog to nearly 8,600 planes at the half-year mark. That’s more than 11 times the number of planes Airbus expects to deliver this year (770 planes), leaving demand in good shape for years to come.
In the first half of the year, revenue rose 4% to €28.8bn, reflecting an increased number of plane deliveries and higher volumes in other areas of the business. While we’re positive about the outlook, there are still some issues.
The main risk is whether production levels can be ramped up fast enough to deliver on promises. Supply chain issues have affected the whole industry, and Airbus isn’t immune, leading the group to wind back delivery expectations this year.
It also downgraded full-year operating profit and free cash flow targets back in June, after an in-depth review into the Space division by the new management team. The division incurred a €0.9bn charge from mispricing previous contracts, and there’s a chance that the dent to profits will end up being a bit worse.
With limited competition, strong demand, and good pricing power, market dynamics look favourable. The valuation is broadly in line with peers, which we think undervalues a dominant market position and growth outlook. But supply chain issues are likely to still be a challenge for some time.
Prices delayed by at least 15 minutes
Prices delayed by at least 15 minutes
easyJet A low-cost airline operating more than 1,000 routes across Europe, easyJet’s one of the biggest airlines in the world. The sheer size of its operations creates efficiencies, helping keep costs low.
It’s focus on popular routes in major airports, sets it apart from other low-cost carriers who trim costs by using smaller, less convenient airports.
The group’s third-quarter numbers landed a little better than markets expected. Revenue rose 11% to £2.6bn, mainly because passenger numbers were up 8% to 23.5mn.
Revenue per passenger is still moving in the right direction, partly thanks to in-flight extras. So-called ‘ancillary revenues’ are things like hold baggage, extra legroom, and food. This is a very profitable area, and growth has been impressive. Alongside broadly flat fuel costs, third quarter underlying pre-tax profits increased 16% to £236mn.
We think there’s good demand right now. On the supply side, the pandemic stunted capacity growth and it could be years before it’s back up again. With little sign of slowing demand, prices are likely to hold firm in the medium term.
But there are some issues to be aware of.
Fuel costs are a big part of running an airline, and are largely outside of the group’s control. If there were any supply shocks that sent oil prices higher, easyJet’s profitability would likely suffer. The sector could also be sensitive to further escalations in geopolitical tensions.
The balance sheet’s in much better shape than a few years ago, supporting the reinstatement of dividends . Right now, there’s a respectable forward dividend yield of 3.4% but as always, no dividends are guaranteed.
easyJet’s valuation is well below the long-run average, which we feel doesn’t reflect its market position or growth opportunities. The long-term picture looks positive to us, but there are no guarantees. There are some risks to watch out for, especially in the short term, so ups and downs are inevitable.
An independent Non-Executive director of Hargreaves Lansdown plc is also an Independent Non-Executive Director of easyJet plc.
Prices delayed by at least 15 minutes
Prices delayed by at least 15 minutes
TUI TUI isn’t just an airline. It owns hotels, resorts, and cruises, giving around 19 million customers a year the choice of over 180 destinations.
Recent history hasn’t been kind to the group. Investors might remember repeated government rescues, mounting net debt, and severe shareholder dilution as TUI issued new equity in a scramble for cash.
It’s easy to still see TUI as it was then – a struggling company in a struggling package holiday market. But the package holiday market is a very different place now.
When rival Thomas Cook went bankrupt, it completely changed the market dynamic. Holiday operators (like TUI and Thomas Cook) used to commit to hotel room inventory ahead of time and losing out if those rooms weren’t filled.
But with Thomas Cook out of the picture, TUI has more market share and a stronger competitive position.
Now, the group can afford to be much more flexible on capacity, and only commits to around two-thirds of its flights and rooms. The rest is filled ad-hoc, meaning if big demand shocks like Covid-19 or a European heatwave come round again, profitability is much better protected.
An improved digital journey is also letting the group try and cross-sell products and tours through personalised customer experiences.
While painful for shareholders at the time, the €1.8bn capital raise back in April 2023 closed a miserable chapter for the group. There hasn’t been a bigger reduction in net debt anywhere across the travel and leisure sector since.
We’re impressed by the change and think the balance sheet is in good shape. This means dividends could return at some point, but there are no guarantees. Bear in mind, the shares aren’t listed in London anymore, so any dividend income could be subject to withholding tax.
Given all the changes, we’re supportive of the outlook and like TUI’s position in the space. Revenue in the third quarter rose 9% to a record €5.8bn, supported by both higher volumes and prices. Continued progress on all fronts should have a big impact on the bottom line, leaving full-year guidance of at least 25% growth in underlying operating profit unchanged.
The current valuation is well below the long-run average. We feel this reflects the challenges of the past, not the transformed and fundamentally healthier business moving forward. Demand shocks are still a risk though, and there’s no telling how long it could take for public feeling around this business to change.
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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.
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Written by
Aarin Chiekrie
Equity Analyst
Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.
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Published: 22nd August 2024
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