A heat wave could be on the way, ending a spell of discouraging weather. But even as Britain basks in the sun, many of us will still book a holiday abroad. It’s a preference that investors conducting a midsummer portfolio review should keep in mind.
The unquenchable desire for a holiday abroad appears to be the most lasting post-pandemic change in consumer behavior, according to airline bosses. Previously, this type of ‘revenge’ spending was seen by some as a passing phenomenon.
Luis Gallego, head of British Airways owner IAG, says ‘high demand for travel is a continuing trend’, while Wizz Air boss József Váradi also feels a fortnight at the beach or pool is considered a priority .
As a result, the International Air Transport Association (IATA) expects record numbers of passengers this year. The recovery is driven by short-haul flights, packed with tourists.
Business travelers are also returning, with tech bosses preferring in-person meetings to Zoom. Until other executives decide to take flight, wealthy individuals, willing to pay extra for comfort, occupy business class seats.
Takeoff?: There’s no guarantee of top performance, but there are bargains on offer
Quilter Cheviot’s Tom Gilbey highlights the benefits arising from the industry’s new atmosphere of rationality.
Post-pandemic consolidation has made the sector leaner. Meanwhile, problems at aircraft manufacturer Boeing have limited growth in fleet capacity, potentially curtailing overly ambitious expansion plans. He notes: ‘This combination of a disciplined supply side and a robust demand environment suggests a positive outlook for the aviation sector going forward.’
Investors excited by the opportunities presented should be prepared for global shocks that wreak havoc on the aviation sector, as Covid illustrated.
Furthermore, even before the announcement of the general election, easyJet’s Johan Lundgren and Ryanair’s Michael O’Leary felt that some customers were becoming increasingly resistant to high ticket prices. The suspicions surrounding the Labor government’s true plans for tax increases could make more households reluctant to spend.
Meanwhile, in the longer term, there is the possibility of further legislation to limit the environmental impacts of flying. IATA predicts that airlines worldwide will use 99 billion liters of fuel this year, a 3 percent increase over 2019 consumption.
Due to these factors, there is no guarantee of top performance, but bargains are offered.
IAG
International Consolidated Airlines has an empire that includes not only British Airways, but also Aer Lingus, Iberia and Vueling.
The company’s debt pile has been reduced and Gallego is confident the turnaround will not be reversed.
Yet the shares are at 164p – 47 percent below their level five years ago – and trading at just four times earnings.
Analysts from BNP Paribas Exane and JP Morgan are among those who believe the stock is undervalued.
This week, for example, RBC’s Ruairi Cullinane reiterated his view that IAG was a ‘buy’ with a price target of 230 cents. The average target price is 270p.
EasyJet
Most analysts rate this low-cost airline as a bargain, despite fears that “revenge” spending on getaways may decline.
At 449 pence, the shares are 40 percent below five years ago, but there is hope for a rebound as the average analyst price is 706 pence.
Lundgren will leave his top job next year after building a profitable package travel division and cutting loans.
Ryanair
Ryanair, run by the eternally choleric O’Leary, is now Europe’s largest airline.
But the country has been hit hard by Boeing’s problems, which have delayed the arrival of new planes for the fleet.
Shares of the Dublin-listed company have fallen 11 percent since the start of the year to 17 euros.
But most analysts still rate Ryanair as a ‘buy’, with an average price target of €24.96.
O’Leary will receive a €100 million bonus if the share price remains above €21 for 28 days.
In this sector there is little shame about sky-high wages.
Jet2
This Aim-listed company is not just an airline, it is also Britain’s largest tour operator, an activity that offers bigger margins.
The shares are up 4 per cent this year to 1298p, after rising 442p over the past decade.
Most analysts rate Jet2 as a ‘buy’, with an average price target of 1892p. The pricing power of airlines will be tested.
But Jet2’s good behavior during the pandemic – deposits were returned in a timely manner – could give the company an advantage over its rivals.
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