As Covid-19 continues to lead countries around the world to place restrictions on international travel, air traffic has dried up. This spells disaster for airline stocks listed in the FTSE 100.
As a result, budget airline operator easyJet (LSE: EZJ) took the decision to ground its entire fleet on Monday. Inevitably, the company’s share price took another hit as markets digested the news. This now amounts to around a 60% plummet in the share price since the start of the year.
Other airline stocks such as International Consolidated Airlines Group (LSE: IAG), Ryanair, Wizz Air, and TUI AG have followed a similar path. Does this monumental price decrease signal that now is a good time to buy in?
A solemn warning
Last week The Financial Times reported that, according to the head of IAG, there’s no guarantee that many European airlines will survive this crisis.
Income streams are beginning to dry up and more pressure is being placed on already strained cash flows to ensure survival. Companies will soon be in need of government support. In fact, Virgin Atlantic has already asked the government for a bailout.
IATA, the industry association of the world’s airlines, has forecasted revenues will drop to nearly half in 2020. As a result of the unfolding pandemic, governments around the world will be called upon to save their crisis-hit airlines.
With that in mind, no investor wants to pile into a company that’s about to go under. It’s for this reason that I’d exercise extreme caution when it comes to investing in airline stocks at the moment.
Hope for the future
The dirt-cheap valuations that the easyJet and IAG are trading on right now is an inviting prospect for value investors.
Price-to-earnings ratios are at all-time lows in the FTSE 100 among the airline stocks. EasyJet is trading with a P/E ratio of 6.29, IAG is at 2.71, and Wizz Air at 5.85. This suggests moving forward with caution. But it also reveals that there’s certainly some value there.
Last week, easyJet reported £1.65bn in net cash and a $500m revolving credit line. What’s more, in a group statement released last Monday, the company stated that it maintains a strong balance sheet, with no debt refinancing due until 2022.
With the group in ongoing discussions with liquidity providers, I think if there’s a way out of this storm, shares in easyJet promise rewarding returns for investors confident enough to stand by the company.
As for IAG, I think its high levels of liquidity put it in a stronger position than some of its peers. As of 12 March, the company reported €7.35bn of cash and cash equivalents on its balance sheet. However, nobody can honestly say whether this will suffice given the uncertainty that surrounds the future of air travel.
Undoubtedly, the hit to earnings will be ugly for all airlines over the coming months. That said, I believe those companies with healthy balance sheets and strong enough cash flows are in a position to make it out to the other side.
If so, expect investors to be rewarded with attractive returns as airline companies set themselves back on track once passenger travel resumes.
