Airlines Shares before Summer travel (EasyJet & IAG)

Airlines have been readying for a bumper holiday season after the pandemic was over, but soaring costs and a cost of living crisis could mean people less willing to travel.

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Still not generating income

Airline shares are still well below their pre-pandemic levels. In the case of EasyJet and IAG, it's largely because they are still losing money.

Even though both have ramped up sales, last quarter they both reported capacity well below pre-pandemic levels. But also both were very optimistic about the traditional British summer season, with EasyJet predicting a return to pre-pandemic levels (and profitability) by the end of the year.

But over the weekend the WHO disclosed detecting a new covid variant, dubbed XE. It's not known yet how much of a concern it will be. But there are plenty of other worries for the airline industry.

EasyJet's focus on southern European destinations like Spain, Italy and Greece makes its business more resilient to the war in Ukraine, unlike competitor WizzAir.

But, will British tourists be interested in travel when their real earnings are deteriorating due to high inflation at home? UK inflation is at a multi-decade high, and the cost of credit is rising as the BOE tries to deal with inflation. A credit-card-funded getaway to Spain might not be as attractive.

Price isn't always the best point

EasyJet might stand the best chance of capitalising on price-conscious consumers. But a smaller margin will make it harder for the firm to absorb the increased cost of fuel. EasyJet has 60% of its fuel hedged until September, while IAG's 60% fuel hedge is to the end of the year. Fuel represents around 20% of the typical airline's cost. What could provide a temporary boost, though, is that EasyJet is expected to be added to the FTSE 100.

IAG, on the other hand, has a stronger presence on the Atlantic route, which usually provides more stable revenue, since it accounts for more business travellers, but business travel is still down on 2019 levels. Meanwhile its lower-cost, Spain-based Iberia unit is looking to consolidate market share. As a flag carrier, IAG might be able to focus more on longer-term growth, as opposed to budget carrier EasyJet's focus on the upcoming tourist season.

Airlines are in a bear market

Both EasyJet and IAG have been in a bear market since August 17 ’20. Despite recent attempts to break past their 50-day moving averages, share prices have remained under pressure. Without a break – at least—of the respective averages the airline companies are unlikely to see a day of light.

EasyJet is testing multi-year lows, where a double bottom is possible if it holds, where as a new down-leg is likely if it breaks.

IAG is holding stubbornly near multi-year lows following progressively shallower bounces underneath a downtrend line. If the downtrend line breaks a change of trend is possible.

Source: Trading View

Key takeaways

Airlines are not doing as well as before the pandemic, but are optimistic about the upcoming season despite the new variant being detected and high inflation costs.

As budget carriers are in more danger in the short term, IAG's competitive growth might come from long-term expansion. EasyJet has a bumpy return to profitability ahead, but could get a boost from automatic index-related buying thanks to the FTSE listing.