UK Markets open in 7 hrs 15 mins

After the collapse of Flybe, will these airlines be next?

Alan Oscroft
Close-up Of Wooden Blocks With Risk Word In Front Of Businessperson's Hand Holding Magnifying Glass

A day after the collapse of Flybe Group, business news headlines are already proclaiming that it could be the first of many to go bust.

Some analysts are putting estimated costs of the coronavirus pandemic at more than $100bn this year, and a sizeable chunk of that could be borne by airlines. It’s too early to know how many people will avoid flying, but I’ve already postponed a planned long-haul trip myself.

I’m generally bearish on airlines, as they’re mainly driven by factors outside their control. But I’m thinking of things like fuel costs, not rare calamities like a global virus threat. And even if more airlines hit the wall, the whole sector is experiencing plunging share prices. For airlines that come out of this crisis relatively unscathed, we could be looking at a great buying opportunity.

Too big to fail?

International Consolidated Airlines (LSE: IAG), the owner of British Airways and Iberia, is not heading for collapse. I’m as confident of that as I possibly can be. But just look at what’s happened to the share price.

Since 19 February, IAG shares have lost 37% of their value, standing at 402p as I write. That’s dropped the forward P/E down to around four, which seems ludicrously cheap.

That valuation is based on current forecasts for a rise in EPS this year of 15%, which seems unlikely to happen now. Forecasts will need to be revised downwards, perhaps drastically. But even if EPS should crash by 50%, we’d still be looking at a P/E of around eight. And that would still look cheap to me.

Results released in February did show a 5.7% drop in operating profit, even though revenue rose by 5.1%. That was down to higher fuel costs, which is a variable that investors just have to put up with.

But the most glaring fact to me is that the coronavirus effect is going to be short term. However tough 2020 turns out to be, I expect 2021 to be back to normal. Perhaps even better than normal, as more folks head off on those hols that they postponed in 2020.

Higher risk?

The smaller airlines are facing the biggest risks, but I think easyJet (LSE: EZJ) has the resilience to survive and continue to prosper.

The shares have fallen by the same 37% as IAG’s, since 20 February, to 963p. To me that suggests investors are no more concerned about the coronavirus threat to easyJet’s future than they are about IAG’s.

In fact, easyJet shares were already on a higher valuation than IAG’s, with a forward P/E of nine based on current forecasts. That does include the expectation of a 20% EPS rise, which is higher than analysts predict for IAG. And it does mean there’s less breathing room in the easyJet valuation in the event of a serious downgrading of forecasts.

But one thing easyJet has going for it is the way it’s managed. And by that I mean very well. The airline has a reputation among travellers that some of its competitors can only dream of. Yes, I’m looking at you, Ryanair.

The forecast dividend yield has jumped to 5.5%, with IAG’s getting as high as 6.8%. You know, I could even see myself breaking the habit of a lifetime and buying airline shares.

The post After the collapse of Flybe, will these airlines be next? appeared first on The Motley Fool UK.

More reading

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020