Budget airlines EasyJet and Ryanair soar toward investment success

IBTimes UK web link to article, video:

Budget airlines EasyJet and Ryanair soar toward investment success

I recently flew back from Geneva to Paris after a long day of meetings with clients. But I didn't fly with either of the two flag-carrier airlines, Air France or Swiss. Instead, I chose to fly with EasyJet, in the process saving my employer hundreds of euros.

While I did arrive 15 minutes late in Paris, due to the airplane being late to arrive in Geneva in the first place, something else struck me. I was amazed at how full the flight was, with hardly a spare seat left on the aircraft. No chance of me getting the aisle seat I prefer.

What is more, so many people had opted, like me, to pay extra for speedy boarding in an effort to get a seat near the front of the aircraft, that in the end it didn't offer much of a benefit. Except to EasyJet of course, who made more money out of all of us.

That set me thinking – how well is the distinctive orange-liveried airline performing this year? Digging into the monthly passenger traffic statistics from the EasyJet website, the answer seems to be that they are doing very well indeed.

EasyJet enjoys strong passenger growth

Every month this year, EasyJet (UK code EZJ) has carried more passengers in Europe than over the same month in 2014

 For the first 9 months of the year, EasyJet has on average carried 6.5% more passengers than over the same period in 2014.

Clearly, with Ryanair also carrying a record number of passengers in 2015, budget airlines are enjoying a banner year on the back of strong consumer confidence and a stronger pound sterling, which has improved British tourists' purchasing power abroad.

EasyJet's aircraft are fuller than ever

Profit growth isn't just about how many passengers are carried per year; what is at least as important is how full each flight is. This is expressed as 'load factor' - the percentage of an aircraft's seat capacity that is filled by a paying passenger.

In the case of EasyJet, the load factor is also improving this year over 2014: each month since March, EasyJet's load factor has been higher than the corresponding month in 2014. So EasyJet's profits this year should be better than last year's, not only because they are carrying more passengers, but also because each aircraft is on average fuller than last year.

Analysts following EasyJet are forecasting 20% earnings growth for this year, followed by 9% further growth in 2016.

Is EasyJet the only choice in budget airlines?

An investor who wants to capitalise on the growth in budget air travel across Europe actually has a number of investing options apart from EasyJet:

• Ryanair (UK code RYA) is the biggest budget airline in Europe by number of passengers carried. They claim to be the first airline to have carried over 10 million international passengers in one month, achieved in July 2015. They also achieved a record load factor in July of 95%.
• Wizz Air (UK code: WIZZ) is a budget airline that is listed on the London Stock Exchange, and which focuses on no-frills flights out of London Luton to Eastern Europe, including to Poland and the Czech Republic. This is a growth market given the large growth in UK immigration from Poland, Romania and other recent entrants to the European Union over the last few years. They carried nearly 2 million passengers in July 2015, and are seeing 20% year-on-year passenger growth this year.
• Air Berlin, listed in Germany, is a low-cost German airline operator. However, unlike Ryanair and EasyJet, Air Berlin is struggling against Ryanair, EasyJet and Lufthansa, and is projected to make a loss this year.
• Norwegian Air Shuttle, listed in Norway, is a low-cost airline operator that not only operates low-cost flights to and from Scandinavia within Europe, but which also operates long-haul budget flights to New York from London Gatwick. So next time you want to spend a long weekend in the Big Apple on the cheap, look up www.norwegian.com!

A final note on EasyJet: not only is it cheaper on valuation than either Ryanair or Wizz Air, but it also offers a decent 3.7% dividend yield and is sitting on over £400m of cash - both good supports to the share price. While normally I am not a fan of investing in airline shares, I would make an exception for EasyJet.

Edmund

IBTimes: Airlines easyJet, Ryanair and Dart see soaring share prices

IB Times Article + Video Link:
airlines-easyjet-ryanair-dart-see-soaring-share-prices

It is the best of times for UK budget airlines easyJet (code EZJ), Ryanair (RYA) and Jet2 (owned by Dart Group, DTG)! Medium-haul airline passenger traffic to European destinations just keeps on growing as UK households seek to escape to sunnier climes from the generally gloomy weather at home. European air passenger traffic grew nearly 6% over the last quarter of 2014 (Figure 1).

Source: Market Realist, IATA

With a favourable following wind from the strong UK economy flowing through into:

• higher employment (unemployment rate of 5.8%, lowest since mid-2008),
• stronger wage growth and
• record high consumer confidence (highest reading in over 10 years),

this bullish traffic trend should be sustained over this year and into 2016 (Figure 2).

Source: Bloomberg

Both easyJet and Ryanair have ridden this UK consumer boom with a combination of rising passenger traffic (easyJet +6.3% year-on-year; Ryanair +7.6%; Figure 3) and improving load factors (the amount of seats per flight that are occupied; over 90% for easyJet and 87% for Ryanair). A rising load factor means better efficiency, and higher profits.

Source: Stockopedia

Reinforcing this trend, IAG (parent company for British Airways and Iberia) reported stellar passenger growth in January of 12.1% for its European routes compared with January 2014, far outstripping passenger traffic growth for other regions.

Profits Boosted by Lower Fuel Costs

Of course, fuel costs are a huge part of any airline's overall running costs, so the 50% drop in crude oil prices will have a positive leveraged impact on the bottom line for these three companies (Figure 4) – albeit with a lag, given that they all hedge future fuel costs to some degree to reduce the volatility and to improve the predictability of their cost bases.

Source: Platts, RBS, Digital Look

The near-halving in jet fuel costs since mid-2014 will continue to gradually flow through to the profit lines of airline accounts for the rest of this year and well into 2016, providing a following wind for UK airline earnings.

Profitability, Dividends and Cash All on the Rise

The results of these favourable revenue and cost trends on these UK budget carriers can be seen in improvements in profitability, cash flows and dividends, with returns on equity rising steadily for easyJet, Ryanair and Dart Group since 2011 (Figure 5).

Source: Stockopedia

And Yes, Price Momentum Has Already Been Positive

A glance at the share price charts of these three airlines tells you that the stock market is already looking kindly on this sector, with all three shares enjoying strong rising trends over the past 12 months (Figure 6).

Source: Bloomberg

Comparing easyJet, Ryanair, Dart Group? Which One is Best?

At this point, we can see that UK low-cost airlines are riding on the crest of several positive profit waves; but which one should be choose to invest in?

Source: Stockopedia

From Figure 7, I would choose Dart Group (DTG) if I had to choose only one airline horse to back – it is the cheapest by far on both price/earnings (adjusted for net cash) and EV/EBITDA valuation ratios, has the best cash backing on its balance sheet (around £180m of net cash once you subtract cash held on advance customer bookings) and has relatively lower leverage from the leasing of airplanes, with only 9 out of its 53-strong fleet being leased (the other 44 being owned outright by the airline).

With Dart Group, I would argue that you are getting exposure to a real deep value situation which is already seeing positive price momentum, and with room for growth as ticket sales continue to fly.

But if you prefer a larger company with a decent dividend yield, then by all means opt for Easyjet (EZJ) with its 3.4% yield, which I chose as one of my Santa's Secret 6 Stock Tips back on December 18.