Investing in airlines: what are the top airline stocks to watch?

Investing in airlines: a snapshot of the European airline market

The European airline market is undergoing major change. Many newer and smaller rivals are starting to falter while the five largest European airlines are increasing their share of the market. This is partly because the Big Five – Lufthansa, Ryanair, International Consolidated Airlines Group (IAG), easyJet and Air France-KLM – have leveraged their superior scale, which is only growing amid a wave of consolidation. Most of the market leaders are the creations of major mergers over the last 20 years. Air France merged with KLM Royal Dutch in 2004, while both IAG and Lufthansa each have diverse brands within their portfolio following a string of deals.

Meanwhile, smaller firms continue to falter: at least 14 European airlines have collapsed since the start of 2018 including the likes of WOW in Iceland, VLM in Belgium, Cobalt Air of Cyprus, Primera Air in Latvia or Swiss airline SkyWork.

It seems being swallowed up by a competitor is the only way many of the small-to-medium sized carriers operating in Europe will survive. However, many of the biggest players have pounced on the assets of others only once they have collapsed. For example, Lufthansa has made an offer for certain assets owned by the struggling holiday and flight operator Thomas Cook as it looks to pick apart the business. Bankrupt Italian carrier Alitalia also has a number of interested parties circling.

The chief executive officer (CEO) of Ryanair, Michael O’Leary, has said the market will continue to consolidate under the Big Five for the foreseeable future and that sentiment has been echoed by many of his peers. The market is still highly fragmented. According to Scope Ratings, the Big Five collectively secured the lion’s share of the market for the first time last year, whereas the Big Four airlines in the US control almost 70% of traffic over the pond. The need for European airlines to consolidate is also heightened by the fact they are far less profitable than their US counterparts.

European airline market share: what’s the biggest airline in Europe?

(Source: Scope Ratings)

Top European airline stocks

1. Lufthansa
2. Ryanair
3. IAG
4. Air France-KLM
5. easyJet

Although European airline stocks share many of the same drivers, such as the price of fuel, the investment case for each of the Big Five is more varied and diverse compared to the Big Four in the US. Some are confined to Europe while others have a larger international presence, some focus on quality while others on price, and not all of them reward shareholders with dividends. The grounding of Boeing aircraft after two fatal crashes is a prime example as this has had less of an impact on those using planes made by Boeing’s only rival, European outfit Airbus. Another example is Brexit, which, although a huge threat to the entire industry, will impact UK-based carriers more than European ones.

Deutsche Lufthansa

Lufthansa is a German airline with multiple brands spanning Europe. It has a number of network airlines offering a premium service to customers including Lufthansa German, SWISS and Austrian Airlines and its low-cost Eurowings brands. This gives it exposure to both ends of the market, although its network airlines generate over 60% of revenue compared to just 12% from Eurowings.

Lufthansa has seen revenue growth slow and profit fell in 2018 after delivering a record result the previous year. Its dividend was raised in 2017 and was maintained last year and it does pay special payouts and conduct share buybacks. However, the company’s share price has come under pressure since hitting recent highs in 2017. Lufthansa’s financial year runs to the end of December.

You can look at Lufthansa’s most recent quarterly results and view future news and earnings updates here.

Ryanair

Ryanair is the pioneer of low-cost, short-haul flights within Europe and its success has been largely down to its no-thrills service that has allowed it to keep costs down. It has also captured vast traffic on new routes it sets up as it often introduces a cut-price option for travellers to visit new destinations.

Ryanair has continued to deliver strong revenue growth but has seen profitability come under pressure after pre-tax profit dipped below the €1 billion mark in the recently-ended financial year to the end of March. Ryanair does not pay an ordinary dividend but it does make special payouts when the bank balance allows it. This gives it more financial flexibility year-to-year but means shareholders receive unreliable payouts. That point is more acute, considering its share price is also far from the highs seen in 2018.

You can look at Ryanair’s most recent quarterly results and view future news and earnings updates here.

International Consolidated Airlines Group

IAG is the owner of several airlines that offer different propositions to flyers. Its premium airlines are British Airways and Iberia, its ‘value’ brands are Aer Lingus and Iberia Express, and Vueling and LEVEL offer low-cost flights.

The company has been one of the best performers over recent years, with revenue and profits continuing to grow steadily. Profit last year was at an all-time high. It has also been very generous to shareholders compared to its rivals, having raised its dividend for four consecutive years and also spraying even larger sums in the form of special payouts and share buybacks for the last three. IAG’s financial year runs to the end of December.

You can look at IAG’s most recent quarterly results and view future news and earnings updates here.

Air France-KLM

Air France offers more routes out of Europe than any other airline in the region, flying to more than 100 countries through its brands Air France, KLM Royal Dutch Airlines and Transavia. It also operates the largest transatlantic joint venture with Delta Air Lines and struggling Alitalia. The airline is backed by the French government, which owns a 14.3% stake, and the Dutch government, which owns 14.0%.

Air France is one of the largest players when it comes to revenue but it is one of the least profitable operators, generating €623 million of pre-tax profit last year from over €26.5 billion of revenue. It also doesn’t pay a dividend. Air France’s financial year runs to the end of December.

You can look at Air France’s latest quarterly results and view future news and earnings updates here.

easyJet

easyJet is a low-cost airline that offers point-to-point routes across Europe. It is either the number one or number two provider on most of the routes it offers. The company has one of the strongest balance sheets in the industry with more cash than debt and an above-average credit rating.

The airline has been one of the better performers in recent years with revenue growth still accelerating rather than slowing down. Profit did improve year-on-year (YoY) in 2018 but the airline is ultimately far less profitable than it was back in 2015. Shareholders also welcomed a return to dividend growth in 2018 following two straight years of cuts. EasyJet’s financial year runs to the end of September.

You can look at easyJet’s latest quarterly results and view future news and earnings updates here.

Investing in airlines: a snapshot of the US airline market

The four largest airlines in the US control around 68% of the domestic market and most of them also play a formidable role in the global market. In fact, Delta Air Lines, American Airlines, United Airlines and Southwest Airlines generated over $150 billion in revenue last year, accounting for 18.5% of the global total. And they are among the most profitable too, with their combined net income of $10.6 billion last year accounting for one-third of the $32.3 billion made by commercial airlines around the world, according to the International Air Transport Association (IATA).

This not only demonstrates the size of these four companies on a global scale but also the opportunity available domestically in large countries like the US, where flying from one side of the nation to the other is more necessary than it is in the likes of Europe, which is more about flying people across borders.

US airline market share: what’s the biggest airline in the US?

(Source: Statista)

Top US airline stocks

There are a lot of similarities between the Big Four and, like their European counterparts, they are impacted by many of the same drivers that affect airlines around the world. The grounding of Boeing aircraft, for example, hit most airlines in the country because they tend to buy their aircraft from the US manufacturer over its European rival. However, they do differ in terms of size, their international footprint and target audience. For example, Delta and United have larger international operations while Southwest Airlines is regarded as more of a domestic low-cost carrier.

Delta Air Lines

Delta Air Lines is the one of the largest passenger airlines in the world and by far the biggest in the US, both in terms of passenger numbers and market cap. Its key US hubs are in Atlanta, Boston, Detroit, Los Angeles, Mexico City, Minneapolis-St Paul, New York, Salt Lake City and Seattle. Its major overseas hubs are in Amsterdam, London, Sao Paulo, Seoul, Tokyo and Paris.

The company has made huge progress and shareholders have reaped the rewards. Revenue has risen by just 10% over the last five years but net income has risen sixfold – from just $659 million billion in 2014 to $3.9 billion in 2018. That has helped fuel growth in its dividend, which has more than quadrupled since 2014 to $1.31 per share in 2018. Shares, however, have only gained 3.7%.

You can look at Delta Air Lines’ latest quarterly results and view future news and earnings updates here.

Southwest Airlines

Southwest Airlines has a narrower focus, mostly flying routes within the US as well as to nearby international markets. The airline serves almost 100 destinations in 40 US states and also flies to nearby countries including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize and Cuba.

Over the last five years Southwest has delivered 18% growth in annual revenue and net income of $3.2 billion in 2018 was 74% higher than the $1.8 billion delivered five years earlier. Shareholders have seen the dividend treble over that same time frame – to 60.5 cents last year – while Southwest shares have gained more than 11%.

You can look at Southwest Airlines’ latest quarterly results and view future news and earnings updates here.

United Airlines

United Airlines is operated by its listed parent, United Continental Holdings, and has domestic hubs in Chicago, Denver, Houston, Los Angeles, New York/Newark, San Francisco and Washington DC. However, it flies to international routes through its membership of the Star Alliance.

United Airlines has continued to grow revenue over recent years, but net income has been slowly declining. Investors have seen shares rise by 27% over the last five years but United is the only one of the Big Four that doesn’t pay a dividend.

You can look at United Airlines’ latest quarterly results and view future news and earnings updates here.

American Airlines

American Airlines predominantly offers intra-country flights in the US with hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington DC. It already offers flights to and from London and has recently launched non-stop flights from the US to Budapest in Hungary, Prague in the Czech Republic, Venice in Italy and Reykjavik in Iceland.

The company has been the worst performer among the Big Four US airlines over the last five years. Revenue has grown by 4.4% since 2014 and net income has more than halved. The dividend has remained flat for the past four years and the share price has slumped.

You can look at American Airlines’ latest quarterly results and view future news and earnings updates here.

Delta vs United vs American vs Southwest: 2018

Below is a financial comparison of the Big Four US airlines based on their respective 2018 financial results. It is clear that top-line numbers, such as the number of passengers, does not translate into bottom-line profit. Instead, it is about how efficiently they operate and their profitability, with operating margins varying from as low as 6% to as high as 15%. Bigger is not necessarily better, as is demonstrated by American Airlines which generates the smallest profit despite carrying more passengers than its rivals.

Open a demo account to practise trading airline shares

How to trade airline stocks

If you want to speculate on the price of airline stocks, you can do so via CFDs. This means you can go long or short. If you go long then you expect the price to rise and if you go short you expect the price to decline.

Trading CFDs also allows you to take advantage of leverage. This means you get full exposure with just a fraction of the total cost. However, your profit or loss will be based on the full size of your position.

Share dealing vs CFDs, which one is best for you?

CFD trading airline stocks

A contract for difference (CFD) is a contract where you agree to exchange the difference in price from when you open the contract to when you close it. To go long, you would buy a CFD. To go short, you would sell a CFD.

What are CFDs?