The sun is shining on the travel sector, at least for now. Much to the satisfaction of investors who have experienced the ‘flight mare’ of 2022, with its delays, cancellations and passenger price drops.
Worldwide airline losses between 2020 and 2022 are estimated at $200 billion.
Stocks in airlines have soared since January. Easyjet is up 58 percent after an 80 percent increase in sales for this first half of the year. IAG, which owns BA, Iberia and Vueling, is up 22 percent. Wizz Air, the low-cost airline, was up 61 percent, and Jet2, the UK’s largest holiday operator, was up 31 percent.
Over the same period, the FTSE All Share Travel & Leisure Index, which consists of companies that capitalize on people’s desire to eat out, go on cruises or take to the air, is up 23 percent.
The recovery in holiday bookings is stronger than expected, even as airlines are raising fares as passenger capacity has not returned to pre-Covid levels.
Some households spend their savings on holidays. Others are under pressure from cost-of-living pressures and higher taxes. Yet they still seem to prioritize an outing.
Jason Hollands of investment platform Bestinvest says: “There is a real reluctance to miss out on some summer sunshine now that the pandemic is behind us and travel restrictions have been lifted.”
Earlier this month, IAG said full-year earnings would now be at the high end of forecasts, thanks to improving demand. Tui also reports a rush of customization – and higher average prices for travel.
But does that mean these are stocks you should add to your portfolio? Or is it dangerous to believe that what broker JP Morgan’s analysts have called this “great profitable summer” for European Airlines could outlast the season?
As always, it’s important to weigh the pros against the cons. There could be high hopes for more share price gains, with one analyst predicting Easyjet could move from the current 508p to 825p. But the consensus is 598p.
Hollands: ‘After a few torrid years, the sector certainly has a spring in its back, with fuel costs easing. Airlines have also focused heavily on achieving net zero carbon emissions, in part due to fines under the EU emissions trading system.
That means the era of cheap travel is over. Airlines are much less focused on price competition and more on their profit margins.’
But these gains are traditionally meager, thanks to high fixed costs, as Alexandra Jackson of Rathbone UK Opportunities fund points out, and they can quickly shrink in the face of unforeseen geopolitical or weather events.
FundCaliber’s James Yardley also urges caution as the UK could still slide into recession. He says, “You buy stocks forever, not just for the summer.”
One way to make the most of the wanderlust resurgence is to buy stock in the companies that provide the resources for travelers who want to eat and shop on the go.
This is based on the pick and shovels approach where the main beneficiaries of the 19th century gold rush were the tool sellers.
Jackson says, “In our fund, we own WH Smith, which has transformed from a High Street notepad retailer to an airline retailer and the food operator SSP.” This company, which owns Caffe Ritazza and Upper Crust in the UK, is one of the world’s largest airport and train station caterers. This month’s purchase of US company Midfield Concession Enterprises will give it a presence at 30 of the 80 largest airports in the US.
Another route to travel is through the First Sentier Global Listed Infrastructure fund, which invests in airport services as well as European and Latin American airports.
It’s worth checking your money to see if you’re already betting on the continued resurgence of the travel industry.
Artemis Select – a top pick of Bestinvest, Jupiter UK Mid-Cap, Ninety One UK Special Situations and IFSL Marlborough Multi-Cap Growth all own Jet2, GAM Star Continental European Equity has a stake in Ryanair.
Jupiter UK Midcap also owns Wizz Air, while Ninety One Special Situations has money in EasyJet
Making an investment hopefully includes an element of travel, but this is especially the case with travel stocks whose fortunes can suddenly change.
But I’m venturing into the industry based on the fact that EasyJet shares, for example, are still down 70 percent from five years ago – and that holidays seem to have become a necessity rather than an indulgence.
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