- Airbus’ dominant market position shouldn’t be overlooked
- easyJet’s Q3 lands ahead of market expectations
- TUI’s transformation is complete
Aarin Chiekrie, equity analyst, Hargreaves Lansdown:
“Gatwick airport is experiencing what it calls one of its busiest summers, with 19.9mn passengers travelling through its gates in the first half of the year. That’s up 7.7% on the prior year, as holidaymakers are showing no signs of slowing down. The likes of Boeing and Airbus delivered 120 passenger jets in July, and the increased number of seats keeps getting filled up with eager sunseekers.
Keep in mind that not so long ago it was Rolls Royce whose valuation was flying low. The group makes the most of its money from engines for long-haul aircraft and the resurgence in air travel has seen its valuation soar – being the FTSE 100’s biggest riser in both 2023 and 2024 year-to-date.
Despite business performances pointing to a bright picture on the horizon, a lot of airline companies feel particularly unloved right now. Valuations across the sector are roughly half that of the broader market, meaning investors won’t have to travel too far to pick up a good deal this summer.
Here are three of the most attractive opportunities investors should consider.
Airbus
Airbus builds aircraft using thousands of parts from companies across the globe, so healthy supply chains are key to operations.
High barriers to entry keep outside competition low. And tragic incidents relating to its biggest competitor, Boeing, have seen airlines place more orders with Airbus. That’s helped push Airbus’ market share of narrow-body planes (think single-aisle aircraft) above 60%, and there’s scope for potential further gains.
Airlines are desperate to upgrade their fleets after years of COVID-19 related underinvestment. Orders keep coming in, pushing the backlog to nearly 8,600 planes at the half-year mark. That’s more than 11 times the number of planes Airbus expects to deliver this year (770 planes), leaving demand in good shape for years to come.
The main risk is whether production levels can be ramped up fast enough to deliver on promises. Supply chain issues have affected the whole industry, and Airbus isn’t immune, leading the group to wind back delivery expectations this year.
With limited competition, strong demand, and good pricing power, market dynamics look favourable. The valuation is broadly in line with peers, which appears to underappreciate a dominant market position and growth outlook.
easyJet
As a low-cost airline operating more than 1,000 routes across Europe, easyJet’s one of the biggest airlines in the world. The sheer size of its operations creates efficiencies, helping keep costs low.
Its focus on popular routes in major airports sets it apart from other low-cost carriers, which trim costs by using smaller, less convenient airports.
Third-quarter numbers landed a little better than markets expected. Revenue per passenger is still moving in the right direction, partly thanks to in-flight extras. So-called ‘ancillary revenues’ are things like hold baggage, extra legroom, and food. This is a very profitable area, and growth has been impressive. Alongside broadly flat fuel costs, third quarter underlying pre-tax profits increased 16% to £236mn.
But keep in mind that fuel costs are a big part of running an airline and are largely outside of the group’s control. If there were any supply shocks that sent oil prices higher, easyJet’s profitability would likely suffer.
easyJet’s valuation is well below the long-run average, which doesn’t reflect its market position or growth opportunities. The long-term picture looks positive, but there are no guarantees.
An independent non-executive director of Hargreaves Lansdown plc is also an independent non-executive director of easyJet plc.
TUI
TUI isn’t just an airline. It owns hotels, resorts, and cruises, giving around 19 million customers a year the choice of over 180 destinations.
When rival Thomas Cook went bankrupt, it completely changed the market dynamic for package holidays. Now TUI has more market share and a stronger competitive position. And thanks to a change in how it manages its capacity, it’s also less sensitive to demand shocks.
Record third-quarter revenue was supported by both higher volumes and prices. This helped to keep full-year guidance of at least 25% growth in underlying operating profit unchanged.
An improved digital journey is also letting the group try and cross-sell products and tours through personalised customer experiences.
A €1.8bn capital raise back in April 2023 also means the balance sheet is now in good shape, so dividends could return at some point in the medium term.
The current valuation is well below the long-run average. This reflects the challenges of the past, not the transformed and fundamentally healthier business moving forward.”
