The past few years have been extremely turbulent for airlines around the world, as pandemic restrictions forced customers to stay at home. These companies experienced huge losses, and their share prices were decimated. An example is easyJet (LSE: EZJ) shares, which have sunk around 70% from their pre-pandemic price.
Despite the pandemic starting to subside, the past year has been no more pretty, with the easyJet share price falling 45%. Factors such as fuel price rises, and inflationary pressures have driven this descent. However, despite easyJet looking cheap at its current price, I am more tempted by another airline stock.
Why am I avoiding easyJet shares?
The main problem in the aviation industry at the moment is the current staff shortages. This has been driven by the huge number of redundancies that were made throughout the pandemic. Flight caps have been added at both Gatwick and Amsterdam, two of easyJet’s most significant operating airports.
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easyJet now expects around 87% capacity compared to 2019 levels in the three months to the end of June. This is down from previous forecasts of 90%. In the following quarter, this should increase to 90%, down from previous forecasts of 97%. This has led to the investment bank Peel Hunt predicting that the airline will now report a loss for the financial year.
There are still many positives with easyJet shares, however. For instance, the company is currently 71% hedged for fuel in the second quarter of FY2022 and 20% hedged for fuel for FY2023. Due to soaring prices of oil, this should help reduce operating costs.
Meanwhile, despite disruption, demand still remains extremely strong, with bookings for July and September in line with 2019.
However, easyJet has dealt with the recent disruption extremely poorly, cancelling the highest number of flights out of any airline. For this reason, I believe there are better options in the aviation industry.
My favourite airline stock
Due to the current uncertainties with UK airlines, I am more tempted by international carriers. Southwest Airlines (NYSE: LUV) is the world’s largest low-cost carrier. It has also recovered well from the pandemic, which is why I am very tempted to buy right now.
For example, in Q2 it expects revenues to be 10% higher than the same period in 2019. In addition, profitability has returned and earnings per share are expected to rise to around $2.67 this year, before soaring to $3.84 per share in 2023. Such strong profitability differentiates Southwest to easyJet.
Finally, unlike other US airlines, Southwest hedges a large percentage of its oil. This is expected to lead to cost savings of $1.2bn this year. It also means that Southwest is expected to report Q2 operating margins of 15.5%, far larger than other airlines.
Although inflationary issues may prevent consumers from travelling as much, Southwest seems one of the most robust candidates in the airline industry. For this reason, I am very tempted to buy its shares in the next few weeks.
