At first glance, it isn’t clear why anyone would invest in airlines. The sector tends to find itself at the mercy of economic cycles; companies are asset-intensive and typically highly leveraged; and low margins mean they aren’t particularly profitable even in the good times.
Recent share price moves tell a different tale, however. The market value of International Airlines Group, the British Airways owner, has risen by almost two thirds this year. Shares in low-cost carrier Jet2, a rare Aim-listed success story, are up 30 per cent. The benefit of cyclicality is that downbeat sentiment can quickly reverse.
Plenty of scepticism remains. Most airline valuations sit below pre-pandemic averages, despite two years of post-pandemic “revenge spending” on travel. One weakness is that well-publicised issues at plane suppliers Boeing and Airbus have made it hard to capitalise on demand by scaling up.
That may prove a blessing in disguise if concerns about the resilience of this demand, sparked by summer warnings at companies ranging from American Airlines to Ryanair, prove on the money. Most UK-listed operators have shrugged off this risk so far. IAG, easyJet and Jet2 provided reassuring updates this month. Wizz Air, hit by Pratt & Whitney engine issues, was an exception.
Routes to prosperity differ. IAG, notwithstanding British Airways’ growing operational issues, still banks on its transatlantic routes. Jet2 has benefited from the expansion of its more profitable package holiday arm. For now, the shared attribute is pricing power: the ability to pass on cost increases with little hit to sales volumes.
BUY: EasyJet (EZJ)
Passenger numbers rose by 7 per cent in the second half and demand at the holidays arm is robust, writes Christopher Akers.
EasyJet’s headline profits grew by 34 per cent to £610mn in the year to September 30, after the low-cost airline enjoyed another strong summer.
Annual revenue rose 14 per cent to £9.31bn on capacity growth of 8 per cent, higher seat pricing and robust package holidays growth. Passenger revenue was up 9 per cent, ancillary revenue up 14 per cent, and holidays revenue up 47 per cent.
Pre-tax profit growth was led by the holidays arm, where the bottom line more than doubled to £190mn as customer numbers grew 36 per cent and UK market share rose from 5 per cent to 7 per cent. The company expects customer growth of a quarter in 2025, while the medium-term profit target of £250mn is in sight.
Meanwhile, profits at the airline business improved 26 per cent to £420mn. Airline passenger revenue per seat was up 1 per cent on an annual basis and in the fourth quarter.
Guidance is for capacity growth of 3 per cent this year, with an expected 8 per cent rise in available seat kilometres and sector length increase of 5 per cent highlighting more winter sun destinations. Management forecasts a “significant improvement” in winter losses in the first quarter.
EasyJet trades on an undemanding eight times forward consensus earnings. While the path of load factors and yields is challenging to pinpoint, clear demand strength and an improving return on capital employed means we move higher again.
BUY: Jet2 (JET2)
Profit for key summer trading period beats forecasts, writes Michael Fahy.
Jet2 enjoyed another bumper summer, displaying few signs that it had suffered the same level of pricing pressure as peers.
Even after increasing capacity by 13 per cent, it filled most of its planes. Total passenger numbers were up 11 per cent, and the number of higher-margin holiday package customers grew by 8 per cent. Prices also increased by 6 per cent as “supply-led inflationary increases were passed on”.
Flight-only passenger numbers were up 18 per cent, so although ticket yields softened by 1 per cent to £131, the overall increase in numbers meant its total margin improved.
Indeed, the group’s profit before tax and currency fluctuations grew by 16 per cent to £772mn, which was around £150mn higher than consensus forecasts. Even though the company will declare a loss during the quieter winter period, therefore, full-year earnings are also on track to beat forecasts.
Jet2 took delivery of 10 new Airbus A321neo planes during the period, which will help it to increase capacity by a further 9 per cent next summer. The increased capex involved isn’t (at least for now) an issue, given a net cash balance of £2.3bn (or £984mn if customer deposits and leases are excluded). The main concern is therefore whether Jet2 can continue to fill the extra seats. It has been helped this year by the fact that rivals, including Ryanair and Wizz Air, have had their own expansion plans curtailed by supply chain problems.
Both management and analysts remain confident, with the latter group forecasting a 6 per cent increase in earnings per share this year, followed by 5 per cent next. With the shares trading at less than eight times forecast earnings, we also remain upbeat.
HOLD: Halfords (HFD)
Shares rally but the company faces obstacles to hitting mid-term targets, writes Michael Fahy.
The 14 per cent bounce in Halfords’ share price after a fairly pedestrian set of results might have been more surprising if the shares hadn’t fallen by the same amount on the back of a similarly anodyne trading statement last month.
Investors are clearly jittery, given the company’s recent history of profit warnings.
A small uplift in revenue in its autocentres business made up for a similarly marginal decline in retail sales, with the net effect being flat like-for-like sales.
Underlying pre-tax profit was also flat, but £3.2mn of one-off costs covering branch closures, a new warehouse management system and cloud migration costs meant reported pre-tax profit fell by 23 per cent.
Free cash flow was strong at £28.1mn, though, allowing the company to finish the period with a small net cash balance (excluding leases).
Management were happy enough with the result, too, pointing to headwinds including inflation, “record labour cost increases” and higher business rates.
The cycling market remains “in faster decline than expected”, chief financial officer Jo Hartley told investors, with volumes about a third below pre-pandemic levels. Demand for tyres also remains 13 per cent lower but is slowly returning to growth.
Both Halfords’ motoring products and motoring services businesses reported decent growth, though, with the latter being the standout. It has managed to increase its share of a growing market, with better-trained mechanics able to identify more work required on a vehicle. “We’ve seen an impressive 30 per cent increase in work identified,” chief executive Graham Stapleton said.
Although current trading remains “uncertain” following the recent Budget, which will add another £23mn of labour costs from next April, Halfords remains on track to meet consensus forecasts.
However, the post-results jump brings its share price up to nearly 16 times forecast earnings. Although this falls to 13 times on 2026 estimates, the company has also said that progress towards the £90mn-£110mn medium term pre-tax profit target set at last year’s capital markets day has slowed. It has yet to see the recovery in end markets it expected, and management think it will be “challenging to fully mitigate” the additional costs from the Budget in the short term, particularly in retail sales.
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