Airlines see shares finally take flight, but is it time to buy?

The aviation industry has been hit hardest by the coronavirus pandemic, with airlines grounded for months, wiping out companies profits and sending share prices tumbling.

But with lockdown restrictions easing over the summer months and holidaymakers desperate to travel, airline stocks like International Consolidated Airlines Group (IAG), easyJet and Ryanair have finally seen their shares take flight again.

But with intermittent spikes in new Covid-19 cases throughout Europe leading to travel restrictions and quarantines for passengers returning from holiday, is the recent rally by airline stocks looks like it will be short-lived?

IAG shares struggle ahead of €2.75bn rights issue

Despite IAG shares surging in the first half of August, analysts at Davy cut their rating for the stock to ‘neutral’ and issued a target price of 200p ahead of the company’s €2.75 billion rights issue.

As it stands, IAG shares are trading below that target at 192p at the time of publication, with the stock down 70% year-to-date.

In a note to clients, Davy analysts Stephen Furlong and Ross Harvey said that IAG’s upcoming rights issue, which is expected to take place in September, will likely dilute shareholders by at least 50% in exchange of the €2.75 billion the company seeks.

‘We… downgrade IAG to 'neutral' with its highly dilutive rights issue to come in September,’ Furlong and Harvey wrote.

‘The pertinent question for the network airlines, which transfer passengers through large hubs connecting long-haul destinations, is whether they can recover and, if so, how long will this take.’

The path ahead remains challenging for the British Airways owner, with company admitting it will take at least four years to return to pre-crisis passenger levels.

IAG is forecast to record a €2.9 billion operating loss in 2020. The airline group’s outlook in the years ahead is promising, however, with it expecting to generate €620 million profit in 2021, with that figure rising to €2 billion in 2022 and €2.7 billion in 2023.

easyJet shuts down three UK bases amid tougher travel restrictions

The budget airline said that it will close three of its bases in the UK this week after governments tightened travel restrictions in August due to spikes in new coronavirus cases.

The news is a major blow for the UK economy, with easyJet forced to close bases at London Stanstead, Southend and Newcastle airports after passenger demand has waned, with 1900 job losses expected as a result.

‘We have had to take the very difficult decision to close three UK bases as a result of the unprecedented impact of the pandemic and related travel restrictions, compounded by quarantine measures in the UK which is impacting demand for travel,’ easyJet CEO Johan Lundgren said.

Back in May, the low-cost airline said it would have to cut 4500 jobs across its European operations as a result of the Covid-19 crisis.

easyJet is trading at 558p per share at the time of publication, with the stock down 60% year-to-date.

Ryanair cancels flights after fresh quarantine restrictions

The low-cost airline told investors this week that is will reduce its flight capacity by 20% throughout September and October after passenger bookings suffered a significant hit as a result of Covid-19 related travel restrictions.

Ryanair admitted that the largest cuts to its flight schedule will be on routes to France, Spain, Sweden and Ireland.

Ryanair accused Ireland of having the most restrictive quarantine rules and urged the country to amend its ‘green list’ of safe countries. But with new coronavirus cases emerging throughout Europe things are likely to get a lot worse for Ryanair and its peers.

‘These capacity cuts and frequency reductions for the months of Sept & Oct are necessary given the recent weakness in forward bookings due to Covid restrictions in a number of EU countries,’ a spokesperson for Ryanair said.

‘Proper testing at airports, and effective tracing (as is being conducted in Germany and Italy) is the only realistic and proportionate method of supervising safe intra-EU air travel while effectively limiting the spread of the Covid-19 virus,’ the spokesperson added.

European governments travel restrictions have dried up flight demand to countries subjected to 14-day self-isolation protocols, applying intense pressure on airlines and the wider travel industry.

Unsurprisingly, the outlook for Ryanair shares remains uncertain, with a median 12-month price target of €15 and a low estimate of €11.50.

Ryanair is trading at €11.32 per share at the time of publication, with the stock down 24% year-to-date.

How to trade stocks with IG

Looking to trade IAG, easyJet, Ryanair and other stocks? Open a live or demo account with IG and buy (long) or sell (short) shares using derivatives like CFDs and spread bets in a few easy steps:

1. Create an IG trading account or log in to your existing account
2. Enter ‘International Consolidated Airlines Group’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade