Long-haul airlines are facing new challenges due to the war in Ukraine. British Airways owner International Consolidated Airlines Group (LSE: IAG) and jet engine maker Rolls-Royce (LSE: RR) have both recorded share price slumps since 24 February.
Both of these companies depend on long-haul air travel for much of their profit, but which of these stocks offers me the best buying opportunity today? I’ve been taking a closer look.
Broker forecasts: IAG 1, Rolls 1
One way to compare IAG and Rolls-Royce is by looking at earnings forecasts for each company. Both of these firms are FTSE 100 companies. This means they get in-depth coverage from experienced City analysts.
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Rolls-Royce is expected to generate earnings of 4.5p per share in 2022, rising to 6.5p per share in 2023. At 94p, that prices Rolls shares on 21 times 2022 earnings, falling to a multiple of 15 in 2023. That suggests a steady recovery in earnings and sounds quite positive to me.
By contrast, IAG is only expected to scrape a small profit this year, with forecast earnings of 1.5p per share. That prices the stock at a sky-high 89 times forecast earnings. Analysts are pinning all their hopes on a much stronger return to normal in 2023, when they’re predicting earnings of 27p per share. That would price the stock on just five times earnings.
Based on earnings forecasts alone, Rolls-Royce looks better value today, but IAG could turn out to be a bargain if the market recovers strongly in 2023.
Rolls-Royce share price: global support
Globally, Rolls-Royce is one of only three large suppliers of jet engines for widebody aircraft. If your airline flies long haul routes, there’s a good chance you have some Rolls-Royce engines. Once you buy them, you’re tied into long-term maintenance contracts. This is where Rolls makes its profits.
However, Rolls-Royce’s revenue is linked to engines’ flying hours, so it can be hit hard by downturns in flying. In addition, the group is still in the early stages of developing low-emissions power plants and is also hunting for a new chief executive.
There’s still plenty that could go wrong for Rolls-Royce over the next decade. But on balance, I think the group has good long-term growth potential. I’m less sure about IAG, which relies heavily on long-haul routes from the UK and Europe. It’s a competitive market, so there’s always pressure on pricing.
Even if business travellers are ready to return to the skies again, IAG faces rising fuel costs and long diversions around Russia and Ukraine. In my view, these headwinds are likely to put pressure on profit margins.
Rolls-Royce vs IAG: my choice
Air travel is highly cyclical and prone to sudden disruption. I’m not sure it’s the safest area for me to invest.
However, if I was buying aviation shares today, I would certainly choose Rolls-Royce over IAG. The British engineering group has a global market share and proprietary technology. These make it a superior investment to individual airlines, in my view.
Another Rolls-Royce attraction is the group’s large defence business. This has performed well during the pandemic, helping to support the wider group.
At under 100p, I think the Rolls-Royce share price looks decent value as a long-term investment. Although the short-term is unpredictable, I’d be happy to buy a few shares at current levels to hold for the next five to 10 years.
