The demise of Flybe was sad, thought at least it’s good news for employees that Ryanair Holdings and easyJet (LSE: EZJ) are crying out for staff. It made me think about investing in airlines. And if I were to pick one, I think I’d buy easyJet shares.
The share price is up more than 50% so far in 2023, so I’d have missed the 2022 low point if I buy now. But we’re still looking at a 70% fall over the past five years, and the aviation business is only just getting back off the ground. So I see the possibility of a fair bit more recovery potential here.
Manageable debt
What are the three things I like about easyJet right now? Firstly, easyJet does shoulder a bit of a debt burden. The airline recorded net debt of £1.1bn at 31 December 2022. But the company has a market cap of £3.8bn. And considering what it’s has been through, I think that’s manageable.
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International Consolidated Airlines, by contrast, had net debt at 30 September of £9.7bn. That’s more than its entire market cap of £8.4bn.
Ryanair has considerably less debt than easyJet, so it would win on that measure alone. But there’s one thing would keep me from buying it.
Our survey said…
Ryanair, probably easyJet’s closest competitor, consistently scores poorly on customer satisfaction. Maybe that doesn’t matter if it’s making money. But there’s little differentiation between airlines, and what difference there is might count in the long term.
Often there’s no alternative for a specific flight. But whenever I’ve had the choice, I’ve chosen easyJet ahead of Ryanair.
Besides, when I buy shares in a company, I think about it as if I owned the whole company. And I don’t want to own a company whose customers consistently rate it poorly. By contrast, easyJet usually scores much better.
Valuation
Forecasts suggest easyJet should return to profit in 2023. That would put the shares on a price-to-earnings (P/E) ratio of 22. The company has just said that “based on current high levels of demand and strong bookings, easyJet anticipates beating the current market profit expectations for FY23“.
Analysts have the P/E coming down in the next couple of years too. For September 2025, it could be under 12. And we might even see a dividend, currently put at 4%.
I think that’s a decent valuation for a recovery candidate at this stage, especially as the economic background might not turn out as painful as feared.
Airline
So what’s the reason I’d avoid easyJet shares? Even if it might be the best to buy now, I see big risk in the airline business.
It shows in longer-term share prices. Over the past 20 years, easyJet shares have been hugely volatile. They’ve come in slightly below the FTSE 100 overall. But investors unlucky enough to have bought when they were soaring in 2015 will still be sitting on big losses.
For a high-risk business, I’d want more potential upside than from the index as a whole. And I’m just not seeing it.
