Today, easyJet (LSE: EZJ) reported passenger numbers grew 7.6% to 6.56 million in June. The growth in passenger numbers have been accelerating in recent months, as the low-cost carrier benefits from growing leisure and business travel in the UK and across Europe. The airline’s load factor, a measure of the proportion of seats filled to the number of seats available for passengers, rose 0.7 percentage points to 92.7%.
easyJet is keen to shake off the negative image of being a budget airline. It has recently launched a new frequent flyer loyalty programme, in a bid to attract more business travellers and boost customer retention. It has also introduced flexible tickets, allocated seats, airport lounges and increased frequencies between business routes. So far, this strategy is working and other low cost carriers are following suit. But, there are risks that easyJet could lose its competitive edge, as it progressively offers a service level similar to those offered by the legacy carriers.
Rival IAG
Rival airline group IAG (LSE: IAG) is experiencing even faster growth. June passenger numbers grew 9.1%, on strong demand for its long haul routes, particularly to Americas and the Caribbean. A turnaround of passenger numbers for its Spanish airlines, Iberia and Vueling, helped to offset more sluggish growth for British Airways. IAG has a much lower load factor of 83.7%.
IAG’s lower load factors and slimmer operating margins means the increase in passenger will have a much greater impact on its earnings than for easyJet in the medium term. In addition, the airline group is set to benefit from multiple near term catalysts. This includes lower fuel prices, which will likely have a greater impact on IAG’s long haul routes; and its merger with Aer Lingus (LSE: AERL), which will see the airline group gain Aer Lingus’s 23 valuable slot pairs at Heathrow.
IAG’s forward P/E ratio of 10.0 also compares favourable to easyJet’s ratio of 12.4. With a lower valuation on earnings and positive near term catalysts, IAG seems a better buy to easyJet in the medium term.
Or Buy TUI and Thomas Cook Group?
Leisure travel companies, TUI (LSE: TUI) and Thomas Cook Group (LSE: TCG) are also beneficiaries of the increase in consumer spending on tourism. The terrorist attack in Tunisia in June and the crisis developing in Greece has affected investor sentiment with these shares; but the trend of rising tourism spending should continue unabated because of rising household disposable incomes. Weakness in sentiment in the short term should mean these shares are better buys.
TUI which operates hotels, resorts and cruises, in addition to travel agencies, saw revenues grow 7.3% in the first half of the 2014/5 financial year on the back of an increase in online bookings. TUI Travel’s recent merger with TUI AG, its German parent company, should bring in benefits from revenue and cost synergies, through retiring the ‘Thomson’ high street brand and sharing operational resources.
The merger makes earnings comparisons difficult; but analysts expect adjusted EPS in 2015 to be 82.3 pence, which gives TUI a forward P/E ratio of 12.8. This ratio should fall to 10.5, with earnings growth of 22%, estimated for its 2016 year.
Analysts expect Thomas Cook’s adjusted EPS will fall by 5% this year, after a strong performance in 2014. But, this still implies a very attractive forward P/E ratio of 11.9. With improving leisure markets in its core market and continued restructuring efforts, adjusted EPS is forecasted to rise 30% in the following year.
