The sun is shining in the travel industry, at least for now. This is to the great satisfaction of investors who lived through the ‘flightmare’ of 2022, with its passenger delays, cancellations and falls in the price of shares.
Airline losses worldwide between 2020 and 2022 are estimated at $200 billion.
Airline shares have risen since January. Easyjet is up 58 percent having reported an 80 percent increase in their income for this first half of their year.
IAG, which owns BA, Iberia and Vueling, has risen 22 percent. Wizz Air, the low-cost carrier, jumped 61 percent, and Jet2, the UK’s biggest holiday operator, jumped 31 percent.
Over the same period, the FTSE All Share Travel & Leisure Index, which is made up of companies that benefit from people’s desire to eat out, cruise or take to the skies, rose 23 per cent.
The uptick in holiday bookings has been bigger than expected, even though airlines are raising fares because their passenger capacity has not returned to its pre-Covid level.
Some households are spending lockdown savings on vacations. Others are being squeezed by cost-of-living pressures and higher taxes. However, they still seem to be prioritizing a getaway.
Jason Hollands of investment platform Bestinvest says: “There is a real reluctance to do without a bit of summer sun now that the pandemic is behind us and travel restrictions have been lifted.”
Earlier this month, IAG said its full-year earnings would now be at the higher end of forecasts, thanks to a takeoff in demand. Tui is also reporting a flood of customers and higher average prices for rides.
But does this mean these are stocks you should add to your portfolio? Or is it risky to believe that what analysts at brokerage JP Morgan have called this ‘great summer of returns’ for European Airlines could last longer than the season?
As always, it’s important to weigh the positives against the negatives. There may be high hopes for further rises in the share price, with one analyst forecasting that Easyjet could go from its current 508 pence to 825 pence. But the consensus is 598p.
Says Hollands: ‘After a torrid few years, the sector certainly has a spring in its stride, with fuel costs declining. Airlines have also been largely focused on achieving net-zero carbon emissions, driven in part by sanctions under the EU’s Emissions Trading System.
‘That means the era of cheap travel galore is over. Airlines are much less focused on price competition and more conscious of their profit margins.”
But these gains are traditionally small, thanks to high fixed costs, as Alexandra Jackson of the Rathbone UK Opportunities fund points out, and can be quickly eroded by unforeseen geopolitical or weather events.
Up and away: EasyJet shares have performed strongly in recent months
FundCalibre’s James Yardley also urges caution, on the grounds that the UK could still slip into recession. He says, ‘You buy stocks forever, not just for the summer.’
One way to make the most of the resurgence in wanderlust would be to buy shares in the companies that provide the means for travelers who want to snack and shop on the go.
This is based on the pick and shovel approach according to which the main beneficiaries of the 19th century gold rush were the tool dealers.
Says Jackson: “In our fund, we own WH Smith, which has transformed from a High Street notepad seller into an airline retailer and food operator SSP.”
This company, which owns Caffe Ritazza and Upper Crust in the United Kingdom, is one of the largest providers of catering services for airports and train stations in the world. The purchase this month of the American company Midfield Concession Enterprises will allow it to have a presence in 30 of the 80 largest airports in the US.
Another access route to travel is through the First Sentier Global Listed Infrastructure fund, which invests in airport services and in European and Latin American airports.
It’s worth checking your bankroll to see if you’re already betting on the continued renaissance of the travel industry.
Artemis Select, a Bestinvest top pick, Jupiter UK Mid-Cap, Ninety One UK Special Situations and IFSL Marlborough Multi-Cap Growth all have Jet2, GAM Star Continental European Equity has a stake in Ryanair.
Jupiter UK Midcap also owns Wizz Air, while Ninety One Special Situations has money in EasyJet
Embarking on any investment involves an element of traveling luck, but this is especially so with travel stocks whose fortunes can take a sudden setback.
But I’ll venture into the industry on the basis that EasyJet shares, for example, are still 70 per cent lower than they were five years ago, and that vacations seem to have become an essential rather than an indulgence.
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