Proactive Investors - Airlines have been the perennial recovery stocks of the past three years.
Since the start of 2021 pundits have confidently been calling that this would be the year in which the carriers finally got over their Covid hangover and start growing again.
Alas, the reality has been a lot trickier and come the start of 2023 investors in airlines are still yet to see a return to anywhere near the share price levels of 2019.
Timing though is critical in investing hence airlines again are featuring heavily in many tips of the year lists.
A reason is that while share prices might be lagging behind pre-covid levels, at the operational level things are looking much brighter.
All of the listed airlines IAG (British Airways (LON:ICAG)) Ryanair (LON:RYA), EasyJet, Jet2 and WizzAir have issued bullish updates in recent months driven by better passenger numbers and higher capacity levels but also pricing.
Ryanair is the European leader and posted a pre-tax profit of €1.4bn (£1.2bn) in the six months to the end of September following a net loss of €48m in the same period last year.
Michael O'Leary, chief executive, said “Concerns about the impact of recession and rising consumer price inflation on Ryanair's business model have been greatly exaggerated."
O'Leary added he expects the airline "to grow strongly in a recession as consumers won't stop flying, but rather they will become more price sensitive."
Ryanair flew 95mln passengers in its first half, up from 39mln a year earlier and 11% more than the 85.7mln in the same period in 2019 before Covid grounded almost all air travel.
While the Irish carrier is ahead of its rivals in getting passenger numbers back, the trend is consistent.
British Airways’ owner IAG said fourth-quarter capacity is expected to be approximately 87% of 2019 with the first quarter of 2023 expected to be approximately 95% of pre-Covid levels.
“Leisure demand is particularly healthy and leisure revenue has recovered to pre-pandemic levels,” noted chief executive Luis Gallego.
“Business travel continues to recover steadily,” he added, though this was before the US "bomb cyclone".
All encouraging, especially with new more efficient planes on the way and fuel prices starting to turn down, but like Ryanair (€11.22), IAG’s share price (129p) has refused to go anywhere this year.
Possibly it’s due to caution after the previous false dawns but TUI (LON:TUIT) gave a clue as to why it might still be a little early to back the sector.
In an update in December, the travel group said it expected a “solid and a good year in 2023” with prices for the winter season up 28%.
Sebastian Ebel, the group’s new chief executive, even went as far as to say “We have surmounted the existential crisis [Covid], it’s behind us.”
Maybe, but some legacies remain and in almost the same statement TUI confirmed it was planning a rights issue in the New Year to raise between €1.6-1.8bn.
That will clear the bailouts received from the German government at the start of the pandemic.
And there’s the rub. TUI is unlikely to be an exception and there is a nagging feeling that as soon as share prices allow other airlines won’t be shy about raising funds.
IAG, for example, has net debt of around €11bn even though its boasts “strong liquidity” while easyJet’s debts are £700mln.
Even Ryanair, seen as the strongest of the airline bunch, was carrying debt of €500mln at its last showing.
Perhaps the best bet for the sector, therefore, is consolidation. WizzAir has already approached easyJet (LON:EZJ) about a potential merger and possibly as a defensive measure.
EasyJet has also reportedly attracted the attention of IAG and at a conference earlier in the year Gallego hinted that the BA, Vueling and Iberia owner was mulling its expansion options.
“We are a platform for consolidation. We will only do what makes sense but we see there are opportunities to be stronger. We are a group that wants to consolidate the industry,” he said.
Ryanair too is expected to be involved as a buyer if, or more likely when, any shake-out occurs.
So for those looking for an airline sector recovery story this year, the angle might be to overlook the strong and go for the least obvious as that’s where the takeover action could be.