After bad news from Ryanair, is the easyJet share price a buy?

Ryanair Holdings plc (LON: RYA) suffers a big profit fall, and that makes me want to look closely at easyJet plc (LON: EZJ) shares.

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I’ve never invested in an airline and I doubt I ever will. There’s a simple reason. There’s no real differentiation and, at the end of the day, they compete solely on price — because their costs are almost entirely outside of their own control.

Disappointing results

That was brought home to me on Monday with full-year results from Ryanair Holdings (LSE: RYA), which reported a 29% fall in after-tax profit.

The company did boast “the lowest unit costs of any EU airline,” but its ticket prices are very low too, and that seems to be the only way it can attract customers. In January this year, Ryanair won the less-than-coveted title of the UK’s least-liked short-haul airline for the sixth year running in a Which? survey. Do you really want to own shares in a company whose customers dislike it so much?

On the upside, traffic is still running close to capacity — but only, it seems, through heavy fare cuts. And we’re looking at a 36% share price fall over the past 12 months, with no dividends to make up for that loss. Over five years, Ryanair shares are up 37%, easily beating the FTSE 100‘s 7%. But the Footsie has paid dividends averaging around 4% per year, and I don’t see Ryanair as having the safety margin to justify its greater risk.

The best?

As a contrast, easyJet (LSE: EZJ) shares are currently offering a forecast dividend yield of 5.2%, which would be almost twice covered by earnings, and its shares are on a low forward P/E of under 10 (compared to 11.5 for Ryanair with only a tiny dividend).

But in easyJet’s case, we’re looking at a 35% share price drop over the past five years, which puts its overall performance close to Ryanair’s. Saying that, I do see easyJet as probably the best in the business, and it might indeed be a good investment at today’s low valuation for those with a long-term horizon.

But its share price has been extremely volatile, and today it’s at the same level it was in early 2013, having lurched between boom and bust. I just see no reason to expose myself to that level of volatility, not when there are so many reliable alternatives out there with solid dividends and steady share price growth.

Bigger

International Consolidated Airlines Group (LSE: IAG) has put in a decent share price performance over five years with a 25% gain, while also raising its dividends from zero in 2014 to 4.5% last year, and with a further hike to 5.3% on the cards for 2019.

The recent climb in the yield is mostly driven by a 12-month share price slump of 28%, mind, and we are now looking at a very low forward P/E of around five… but at the first-quarter stage, the company reported net debt of €5.23bn (£4.58bn). 

Looking at IAG’s share price performance over the longer term, we’re once again seeing a very rocky and volatile ride.

The airline is profitable, and it is paying good dividends today. But there were no dividends just five years ago, and it is not as if we might never see a dividend cut again. Fuel prices are rising, competition is squeezing airline fares, and the consumer market for air transport is under growing pressure. As I said, I just don’t see the need to take on volatile and risky airline shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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