Airline shares have been the topic of much conversation since the pandemic began. During the stock market crash last year, airline shares were some of the hardest hit. For example, the International Consolidated Airlines Group (LSE: IAG) share price fell around 70% during the depths of the crash from 435p to around 130p, before recovering to levels around 200p at the moment. So when looking for cheap UK stocks to buy, should airline shares be high up on my list?
The case for buying airline shares
If I want to look at UK stocks that are cheap based on their past share price levels, some airlines do tick the box. IAG (mentioned above), had a share price double current levels as we came into 2020. Based on current levels, I could make a strong case that the shares should move higher.
For example, in the March-December period of 2020, passenger kilometers flown were down 87% versus 2019. This was an average of the airlines within the IAG group. These include the likes of British Airways and Aer Lingus. Now I don’t think this will fully bounce back over this summer, or even by the end of the year. But I don’t see how it will fall further.
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The UK has a traffic light system on countries available to travel to, and in my opinion the green list will grow over the summer. This is because Europe is picking up the pace of vaccines being rolled out. Further afield, long-haul business travel could start to see an increase in demand later this year. If we see people continue to return to offices, the next step for corporates is to resume business travel.
I think this makes IAG a cheap UK stock, to buy for the pick-up in momentum over the course of this year and beyond.
Are all airlines cheap UK stocks?
Of course, a cheap UK stock may be cheap for a reason, because no one wants to buy it! This could be the case with airline shares. There’s concern that continued high operating costs and the size of debt taken on will make it hard to generate profitability for 2021.
For example, easyJet released its fiscal half-year results a few weeks ago. My colleague Royston Roche covered it in detail here.
As he noted, easyJet shares fell after the results came out. I could say that a cheap UK stock got even cheaper. ut there were good reasons for the fall. The business had a cash burn rate of £38m a week in Q2, despite revenue falling by 90% year-on-year. This tells me that even without much flying, costs are still high.
My concern across the industry is that even if we see flying miles increase, the amount of cash burnt so far this year (not to mention 2020) is huge. It’ll likely take years to adjust debt back to sustainable levels. If the Bank of England increases rates to counter inflation later this year, it could make it even more expensive to restructure this debt.
Overall, it’s impossible to say all airlines are cheap UK stocks to buy now. I do think there’s value in individual companies. In this case, although I wouldn’t buy easyJet shares, I’d consider buying IAG.
