In November 2016, Warren Buffet’s Berkshire Hathaway revealed that the group had taken a stake in four major US airlines. The sizeable investment by the legendary investor brought the airline industry into the spotlight.
Since then the returns of many of the airline stocks have been mixed as various economic developments have dominated the headlines, including the continuing Brexit saga, interest rate moves by the Federal Reserve in the US, global trade war worries, as well as the volatility in stock markets worldwide.
Most airline shares have not fully participated in the broader stock market recovery we have witnessed so far in 2019. As we are entering the summer holiday season, many analysts are wondering what may be next for the airline industry in the coming months.
Here I am taking a close look at the favourable long-term prospects of two airline stocks, International Consolidated Airlines Group (LSE: IAG), the owner of British Airways, and Wizz Air Holdings (LSE: WIZZ), one of Europe’s largest low-cost airlines.
High-flying dividends
On 28 February, IAG released its annual results for the year to 31 December and it delivered €3.2bn in operating profit, a 9.5% year-on-year (YoY) increase. Its passenger revenue also rose 6.2% versus the prior year. Overall, analysts were pleased with the results that showed a business in good health.
The airline’s passenger load factor reached its highest level since the creation of the group in 2011, after a merger between British Airways and Iberia. Load factor is an essential metric in the airline business as it shows how efficiently a carrier fills seats and generates fare revenue. Therefore increased revenue per passenger, combined with higher load factor, becomes a compelling number.
The company further announced a €700m special dividend on top of an increase in the final dividend. Its current dividend yield stands at a more-than-respectable 5.8%.
Despite the high yield, potential investors have been hesitant to buy into IAG shares so far in 2019, partly because of high fuel costs, Brexit uncertainty, and a possible slowing down of global economies.
The group’s first-quarter 2019 earnings will be released on 10 May and as airlines increasingly begin to look at post-Brexit skies, I’d not be surprised if value investors regain their appetite for IAG shares.
Strong growth outlook
Wizz Air offers over 600 routes from 25 low-cost airport bases in Central and Eastern Europe (CEE).
On 2 April, the group gave an upbeat trading update for the year ending 31 March 2019 when it announced better than expected net profit guidance for the year, potentially coming close to €300m.
The carrier’s load factor also rose from 91.3% to 92.8% YoY. Robust ancillary sales, such as baggage fees and on-board refreshments, have contributed to the positive start to the financial year too.
On 31 May, the airline is expected to release results for the year that ended on 31 March 2019 as well as the outlook for the summer. So far the company has a reliable track record of producing profits.
One upcoming number to look at would be yearly revenue growth, which has been over 15% in the past. Another metric of value is revenue per available seat per kilometre. Analysts are expecting it to increase by 4%. Finally, the City will be looking at the outlook for EPS growth, which is likely to be around 21%. Following the release of these results, potential investors may decide that WIZZ deserves to be in their portfolios.
