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If there is one industry that has been hit hard by the coronavirus, it is the travel sector. Anyone who has been anywhere near Gatwick Airport in the last few weeks will be impressed with its Marie Celeste atmosphere. Airlines around the world have been grounded since March, and while some were undoubtedly going to be the beneficiaries of government support, there has been specualtion about the future of others.

The travel sector is scrambling to salvage something out of this summer as flights resume, although long haul services are still sporadic and to some regions of the world largely non-existent. Airline fleets are also under-manned and will have difficulty getting back up to speed quickly. But airline stocks look cheap right now and there could be a case for buying into some and holding them for 6-12 months.


easyJet shares following a familiar pattern

easyJet (LSE:EZJ) shares show a familiar pattern for airline stocks, having fallen off the proverbial cliff in March. easyJet stock was trading at GBX 1517 on 21 February, but has fallen since then to hit GBX 494. It has done little over May and June as investors sit on their hands. At the moment it is trading at GBX 653, which is a considerable mark up on March lows, but there is still scope to make some healthy profits with an airline stock this cheap.

easyJet raised an extra GBP 419m in a cash call to investors last month. This is on top of GBP 2.4bn in cash and revenues. easyJet looks well cashed up as a result, but this is an airline that sits in the zone between the small carriers and the large fleets like British Airways and Lufthansa – it gets treated by ratings agencies as one of the big boys without the same level of government support when needed. easyJet has a LOT of planes and a huge European staff base and needs to keep one eye on its credit rating as it seeks to refinance further down the line.

Dart Group in recovery mode

Dart Group (LSE:DTG) is another airline which is in recovery mode, and has had to reduce staff salaries by 30%. But it says it is already taking bookings for 2021. Dart Group looks like a riskier play than easyJet, as it is a smaller business (2019 revenue of GBP 3.143 bn vs easyJet’s GBP 6.385 bn). Jefferies International reiterated its buy recommendation for Dart Group in June and set a target price of GBX 1050. Dart Group shares are trading at 737 this morning.

Dart Group stock has set a similar pattern to easyJet’s since the virus took hold in Europe, as investors have wondered when commercial flights would resume. The very fact that those flights ARE resuming should be positive news for the aviation sector, although we are not seeing this with Dart Group, where shares have slid off the 1000 mark in the past few weeks. Analysts remain unsure of its financial health as the latest set of numbers don’t really take into account the full impact of COVID-19.

All is not going to be rosy for the airlines – while they are now flying again and we can expect them to start to schedule more flights in August, recovery of air travel to the glory days of 2018-19 will take time. There are also worries about the spectre of a second wave, which could cause some flights to be cancelled in the future. We doubt there will be an across the board lockdown of the sort seen in March, as governments are now much more aware of the spread of the virus and can react with border closures or city lockdowns as required (e.g. Beijing and Melbourne in recent weeks).

Thus, we anticipate a slow and steady recovery in airline stocks. These look cheap right now, and we anticipate that there will be a gradual recovery in prices over the next few months.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

Comments

This Post Has One Comment
  1. Personally, I would prefer Easy Jet for the NAV and not only. Even with the additional 15% dilution, the share price has still a consistent value. Furthermore, if we see the Operating margin, EZJ a more interesting percentage than DART. The law is only one: low margin = high risk. About debts, I do not feel comfortable with DART in such uncertain time,

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