Last year the FTSE 100 rally was led by two major airlines – International Consolidated Airlines Group (IAG), the parent company of British Airways, and easyJet, the UK discount rival to Ryanair. IAG was up more than 117.21 per cent in 2013 while easyJet came in a close second, gaining 105.07 per cent. The FTSE 100 made a mere 18.7 per cent, although this was its best calendar year return since the financial crisis.
Performance of stocks vs index in 2013
Source: FE Analytics
After such a strong year, it would be understandable to think the stocks could face a tough time, particularly as airlines are often at the mercy of a number of external factors – oil prices, weather and how much money consumers have in their pockets.
Jupiter’s Davies, manager of the four crown-rated Jupiter Undervalued Assets fund and the £1bn Jupiter UK Growth portfolio, says the outlook for IAG is rosy, but warns investors need to be careful given oil prices have been depressed for some time.
“IAG we do own. It’s one of the few really good plays on any kind of eurozone recovery,” he said.
“There aren’t many companies in the FTSE that have a genuine European angle to it, and particularly a Spanish one.”
The manager is positive about the early stages of a recovery in Spain and is holding IAG to benefit from a boost in the peripheral economy.
“The combination of that and a lot of self-help from IAG’s management is very appealing to us,” he said.
“One of the things we have to be slightly mindful of with airlines is that we have a zero weighting in oil and gas stocks because we don’t like the fundamentals of that. So we have to be slightly mindful of doubling that up.”
“Airlines obviously do very well when oil prices are coming down. So there’s a bit of double-counting you have to be wary of,” he added.
While he’s positive on IAG, Davies says he’s not making a call on the airline sector as a whole because of the risks associated with oil prices.
Sheridan Admans (pictured), investment research manager at The Share Centre, says there are a number of headwinds on the horizon for the airline industry, but thinks that both IAG and easyJet are poised for further gains this year.
“We remain concerned over the slow European economy and fuel prices creeping back up, as well as other pressures on the sector, however both airlines in the FTSE 100 have performed well recently,” he said.“easyJet has focused on cost-cutting, while IAG’s management has put in place a strategy to turnaround troubled parts of the business.”
Admans is more positive on the outlook for IAG, rating the stock a buy, because he expects to see a turnaround with its troubled Iberia Airlines operation.
“We are encouraged by the management’s efforts to turn the business around and particularly its plan centred on the Iberian and Spanish operation,” he said.
“As cost savings remains a focus of the group and with the stock looking fairly priced compared with others in the sector, we currently recommend the stock as a buy.”
The Share Centre thinks easyJet is one to hold on to after its stellar run in 2013, namely because it increased its annual dividend and announced a special payout of 44.1 pence per share after the end of the financial year in September.
“The easyJet brand appears to be going from strength to strength and this has been reflected in a soaring share price,” Admans said.
“At current levels we would suggest no more than a hold. easyJet might be impacted by a slightly more competitive market ahead, as legacy carriers start to challenge the no-frills airlines with alternative fare strategies.”
Performance of stock vs index over 3yrs
Source: FE Analytics
Wyn Ellis, travel and leisure analyst at Numis Securities, warns discount airlines will face staunch competition as an improving economy sends more consumers to the skies.
“The concern out there at the moment as we move into a more buoyant phase in the economic cycle is less a concern about a real meltdown – signs of a recovery in the UK economy are going quite strongly, and that will continue – but when improved economic capacity creeps back in to the market, that puts pressure on yield,” he said.
Ellis says a number of low-cost carriers such as Spanish airline Vueling and Norwegian Air will feel the pinch, but he remains relaxed about the prospects for easyJet.
The UK budget airline has made an effort to target business travellers by working with travel management companies to make booking easier and provide more convenient timetables to key airports, efforts Ellis says have helped easyJet land market share from more traditional airlines such as British Airways, part of IAG, and Alitalia.
“easyJet has done a lot of work with travel management companies to make it easier for businesses passengers to book easyJet flights,” he said. “They have good time slots and primary airports or major secondary airports.”
“I see an opportunity for easyJet. There’s more to come there.”
“There continues to be an opportunity for easyJet to take share from legacy carriers as they make capacity cuts.”
However, Ellis says the trend is not as apparent with key continental providers such as Air France and Lufthansa, which aren’t making as many cuts as IAG and Alitalia.
Although the airline delivered stellar returns in 2013, Ellis says he expects another strong 12 months from the airline.
“I see good performance for easyJet in the coming year,” he said.
Ellis said it should be a similar case for IAG, which is more focused on trans-Atlantic travel, because the airline conglomerate is exposed to improving economies on both sides of the globe.
IAG is a top-10 holding in 18 funds in the IMA universe, including CF Odey Continental European, headed up by FE Alpha Manager Feras Al-Chalabi, and Fidelity Moneybuilder Growth. easyJet is a staple in eight, including FE Alpha Manager Tom Dobell’s M&G Recovery fund and the four crown-rated Standard Life UK Equity Income Unconstrained fund.
You can find out more about the leading FTSE 100 stocks of 2013 in the latest issue of FE Trustnet Investazine.
