19 APRIL 2021


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Article from BTNews 19 APRIL 2021

ON THE SOAPBOX SPECIAL: Airline Shares – Worth Buying?

Our veteran contributor, John Burke, who is a financial journalist as well as a travel writer, assesses the outlook for aviation and hospitality shares on stock markets.

There is surprising optimism about travel stocks in spite of the continuing pandemic with its fluctuating statistics, diverse diagnoses and stop-go political measures.  Many shares have rebounded after more than halving in some cases last April or October.

And an amazing paradox is that, although some airlines’ bonds have become junk, American companies leasing aircraft are enjoying a boom, as it is reckoned the safest bet on recovery in the long term.  In the USA, almost $15bn was raised in January. At the same time, venture capitalists leasing out of Guernsey have seen their shares plummet, with Amedeo Air Plus Four hit by discontinuance of the A380 and the troubles at Thai and Emirates.

Yet the stocks of some airlines are already looking healthier.  Among a dozen quoted in New York, four – Delta, American, United and Southwest – are currently being recommended not just to survive but to thrive, although the Arca index did drop 31% due to covid.  Alaska Air is also tipped, while five out of six analysts reckon Air Canada, listed in Toronto, is worth buying, although the shares have halved since 2020.

Qantas shares may take longer to fully recover, despite optimism at Goldman Sachs, although the Australasian travel bubble, due to open on 19 April, has just boosted the shares of all airlines around the Pacific.  Japan Airlines, reconstituted after bankruptcy a decade ago to reach a peak of Y4597 in 2015, is now at Y2268 and off the bottom, but little further gain is expected for now.

Worldwide, more than 50 airlines have become insolvent or bankrupt, ranging from the state-owned South African Airways to LATAM, listed in New York and Santiago.  Typical state bailouts include €9bn for Lufthansa and €3⅓bn for KLM as well as the American Rescue Plan’s $20bn for airports.  Her Majesty’s Government has been less helpful.

It did, however, arrange credit of £2bn to British Airways that partners Iberia and Aer Lingus within International Airlines Group.  Having reached a peak three years ago, IAG shares are back at their 2011 level, yet are up 43% on last April’s low point.  Bank of America notes some positive financial moves, and has IAG among its top picks along with easyJet which Berenberg advises present shareholders to keep.  

Citigroup forecasts that Wizz Air shares will touch 6000p, while Berenberg gives cogent reasons for tipping both this carrier and Ryanair.  It reckons the latter will gain most from downsizing at Alitalia and Norwegian, adding: "Our outlook suggests that 2022 short-haul capacity will be at 85% of 2019 levels, with a full recovery by 2023.”

Even better than brokers’ views are the long-term decisions of investment trusts, as performance suffers if they buy into dud stocks, so it is significant that they overwhelmingly shun cruise lines with their high debt. By contrast, easyJet remains among the top ten holdings of both Aurora and Artemis Alpha, while Temple Bar (a covid convalescent) also has shares because this airline has recovered strongly even if back at its 2012 price.  Mercantile is keeping National Express long-term, although the small stake has been a drag.

Invesco and Law Debenture both have tiny holdings in IAG as part of trusts’ inherent diversification, but most of the 400 largely avoid the travel sector.  Nonetheless, Hilton Worldwide, which has reached a remarkable peak of $127, remains the second-largest holding of Pershing Square, and two Troy trusts hold Intercontinental Hotels.

Yet the shares were accurately downgraded by Deutsche Bank in February, and then by JP Morgan which is also neutral on Accor, being among several brokers to prefer Whitbread, the owner of Premier Inn.   Marriott’s shares are almost back at their $150 peak seen in 2017 and 2019, but the 18 stockbroking analysts forecast they will be anywhere between $127 and $119 in a year’s time.  They similarly hedge their bets on Wetherspoon.

Opinion is even more divided over Eurotunnel (renamed Getlink) which plunged from a peak of €16 back to its 2015 level.  Forecasts from a dozen analysts range from €15.40 to €7.40.  By contrast, Deutsche is the only broker currently looking at Tui which it advises present shareholders to keep.  The shares are down 58% since pre-covid, but are rising erratically.

Most of these facts should reassure frustrated travellers, but those who also invest should beware.  The travel sector is always notoriously fickle, partly for including fashionable and discretionary spending on leisure, but also because it is a hostage to political, climatic and monetary factors.

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