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Despite recession fears, the travel industry shows no signs of slowing down. many FTSE Airline shares have taken off since hitting bottom last year. with IAG (LSE:IAG) and easyJet (LSE:EZJ) is the UK’s most popular airline stock, I’ll decide which one is better for my portfolio.
The case for IAG
IAG is a consolidated airline group. These include the likes of British Airways, Iberia, Aer Lingus, Vueling, and Level. As travel demand remains strong, it’s no surprise that IAG shares are up 20% this year with the potential to fly even higher.
Capacity and load factor are still lagging pre-pandemic levels, especially with Asian routes. So, there is still potential for that FTSE 100 stalwart to continue increasing profits as international travel continues to recover. What’s more, long-haul routes are more profitable, which should boost IAG’s bottom line over time.
In addition, IAG’s premium products like First and Business Class are only at 75% of their 2019 levels. This leaves room for margin expansion as these products are more profitable. This will be one of the unique selling propositions of the stock, as it is in a premium and long-distance market.
However, it is worth noting that IAG’s financials are not good. Sitting at a debt-to-equity ratio of 576% (excluding deferred revenue liabilities) will result in potential future earnings and dividends due to debt repayments.
The case for easyJet
An alternative option is easyJet shares. The Luton-based airline has performed exceptionally well this year, with shares up 40%.
Unlike IAG, easyJet has a slightly different business model. Due to the highly competitive nature of the short-haul market, budget airlines are increasingly adopting a volume-centric model. The goal is to fit as many seats on one plane as possible to maximize revenue and economies of scale.
That said, this strategy has its drawbacks as it tends to produce lower margins. Therefore, easyJet and other low-cost friends have not made a profit since the pandemic. But where easyJet loses in profit, it makes up financially. Unlike their larger competitors, cost-friendly businesses have better balance sheets, giving them a higher margin of safety.
As a result, the FTSE 250 the company expects to turn a profit in September on strong forward orders. And with seat numbers still behind pre-pandemic levels, there is still room for easyJet to increase its numbers.
What are my options?
Having said that, there is no doubt that IAG and easyJet shares are good options for profit. The fact that both stocks are also trading at similar price multiples doesn’t make the buying option any easier.
| Metric | IAG | easyJet | Industry average |
|---|---|---|---|
| Price-to-book (P/B) ratio. | 5.0 | 1.4 | 1.8 |
| Price-to-sales ratio (P/S). | 0.4 | 0.6 | 0.8 |
| Price-to-sales ratio (FP/S). | 0.4 | 0.5 | 0.7 |
| Price-to-earnings ratio (FP/E). | 12.9 | 19.9 | 29.1 |
But if I had to choose, I would go with easyJet shares for two main reasons. The first is future dividends as they seem more secure due to a stronger balance sheet. The second is the new Holidays segment, which allows passengers to book travel packages. This is anticipated to be a growth juggernaut for the company and allow it to expand the profit margin to double digits, which I am a huge fan of. Thus, I will soon buy more easyJet shares for future growth.
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