Planes are soaring off from runways jetting millions away on holiday, but there’s little clarity where the industry will land after the summer.
Aviation is booming — for now. The lingering benefits of Covid’s pent-up demand have supported strong seat sales, ongoing constraints on jet manufacture suggest prices will continue to rise, and with costs expected to stabilise, carriers will rebuild margins back to pre-pandemic levels.
These trends have been noted by investors. Budget carrier Wizz Air is up 30 per cent this year, British Airways owner IAG costs 28 per cent more than at the same time a year earlier and easyJet has risen 15 per cent.
Some carriers are carrying an awful lot of debt, though. Wizz Air tapped the bond market twice during the pandemic, borrowing about €1 billion; the Hungarian airline has a low cost base but 41 new A321neo aircraft will join its fleet in 2024, adding to its balance sheet.
While Wizz’s cashflow is bubbling, that will not make much of a dent in its debts due to the impact of higher interest rates on those aircraft deals. Net debt for 2023 hit €3.9 billion, almost 30 times its cash profit. Wizz also has reputational issues, topping the Civil Aviation Authority’s list of most-delayed flights last year for a second year in a row with an average delay of 46 minutes.
There are clouds on the flight path for demand, too. In the UK, where two-year fixed rate mortgages just hit a 15-year high, next year will see another fall in disposable income. The cost of living crisis will put the affordability of holidays in doubt. Low-cost airlines argue that they will benefit from fliers trading down but Gerald Khoo, the veteran transport analyst at Liberum, has slapped a sell rating on Wizz Air, pointing out that its 7.8 price-to-earnings ratio for 2024 is at a premium to many rivals, who trade at an average 6.6.
“Wizz Air has a significantly weaker balance sheet, with higher leverage than its peers,” Khoo adds. By contrast, package specialist Jet2 posted £5 billion annual revenues, 40 per cent higher than before the pandemic. Its load factors — the proportion of bottoms on available seats — rose to 90.5 per cent, even though capacity increased by some 150 per cent. Its strong balance sheet has decent liquidity but its shares are still well below their £19 pre-Covid peak. Hit hard by the departure of its long-term and entrepreneurial boss Philip Meeson, the stock is now trading at £11.23.
But Jet2’s customers tend to be older and have higher incomes than those of the straight budget carriers, its reputation is far stronger and its management is in good hands. Sell Wizz, buy Jet2.
