The impact of the Covid-19 pandemic has been felt by almost all companies. Among the hardest hit are those in the aviation sector. Some airline shares has seen large drops. Over the past 12 months, the International Consolidated Airline Group share price is down 62%. EasyJet shares are down 45%. And Ryanair shares halved in value at the start of the pandemic, but have since rallied back close to flat. It’s clear that although the movements are mostly negative, there’s a broad range of performance differences between individual companies. It’s important for me to carefully pick the best airline stock to buy.
The good or the bad?
There are two ways of looking at this. I could look to buy the airline shares that have been the hardest hit. The argument would be that the worst-case scenario has already been priced in, and so offers me the most value. On the other hand, I could buy the stock that has performed the best, reasoning that it’s in the best place financially to move forward.
From looking into things, the better performing airline shares are those focused more on short-haul flights. These include Ryanair and Wizz Air in particular. These companies didn’t benefit in normal times from the lucrative long-haul and business travel avenues that the likes of IAG did. In normal circumstances this is a negative, but with Covid-19, it’s actually lessened the revenue hit.
For example, let’s compare the recent Q3 results for Wizz Air and IAG. The latter reported a revenue decrease of 83%, with passenger traffic down 88%. By contrast, Wizz Air revenue was down 76% and passenger numbers dropped 77%. Wizz Air operates more short-haul flights proportionally than the brands within IAG. I think that’s one of the key differences here. The percentage difference might not seem like a huge one, but this accounts for millions of pounds in variation.
If we look at the broader picture, the Wizz Air share price is one of the best performing airline shares over the past year. It’s up around 14%, in comparison to IAG being heavily down.
2021: good for all airline shares?
I could be wrong with my above assumption, and could make a good argument that I should buy IAG (and other potentially undervalued airline shares) instead. If investors have dumped the stock out of fear, it could offer a bargain buy for the long term. And Wizz Air’s recovery isn’t a certainty, of course.
Either way, I do think that all airline shares should see an uplift this year. Yesterday it was reported that there have now been more vaccinations than the number of Covid-19 cases globally. In the UK, over 10m doses have been administered. If this level of rollout is maintained, travel could be much more viable for the summer onwards.
IAG already commented late last year that it saw “pent-up demand”. I think that it’s only a matter of time before airline shares bounce back thanks to stronger results than expected. Due to the low expectations that some have on the stocks, it shouldn’t be too hard to generate a positive surprise in H2 results.
