2016 will go down asa year most airlines will wantto forget. Despite being clear beneficiaries of the oil price slump, shares in companies such as International Consolidated Airlines (LSE: IAG) and easyJet (LSE: EZJ)lost roughly 50% of their value in the immediate aftermath ofJunes momentous EU vote. This unexpected outcome, along with air traffic control strikes and the threat of terrorist activity, has only servedto reaffirm the belief of some that private investors should stay away from this industry.
But with the formerreporting a small rise in profitsthis morning (and the market responding positively), is it time for investors to start boarding again?
Green shoots?
Given itstough operating environment, todays update from IAG wasnt all that bad. The owner of British Airways, Iberia and Aer Lingusreported a Q3 operating profit of 1.205bn (1bn). Earnings per share rose just over 18% and cash levels were at 6.19bn, up 334m on the 2015 year-end. Thanks to the relatively cheap price of oil, fuel unit costs before exceptional items for the quarter were down by 25.8%. Thenot-insignificant 162m (145m) hit from currency fluctuations thanks to the fall in sterling will concernsome.
CEO Willie Walshremainedupbeat, however:Despite this, our unit revenue performance was better than in quarter 2 and our quarterly profit after tax was 970m before exceptional items, an improvement of 9.9% on last year. In the nine months, we made an operating profit before exceptional items of 1,915m, up 6.1% versus last year.
These figures and comments (and a 10% increase to the interim dividend to 11 cents per share) were well-received by the market. In early trading, IAGs shares wereup over5% to 435p.
Contrarian opportunity?
Lets be clear: the share prices of IAG and its peers wont bounce back to pre-referendum levelsovernight. A rising oil price, further industrial action and terrorist incidents could all blight a recovery, at least in the short term. Indeed, after such an awfulfew monthsand with so many variables affecting the share price, I wouldnt be surprised if most investors continued to shun these shares for a whileyet, at least until the mannerof our departure from theEU is clarified.
That said, I can also understand the appeal of IAGand other airline stocks like easyJet for those willing to buy and hold the shares for the long term. As investors in blue chipgiants likeRoyal Dutch Shell and BHP Billiton will testify, buying shares in large, resilient businesses at the point of maximum pessimism can be extremely profitable. Moreover, companies like IAG and easyJet are now trading on very low valuations (forecast price-to-earnings, or P/E, ratios of 6and 10respectively). Then theres the dividends to consider.
Shares in IAG and easyJet both come with forecast yields of just below 5%. Despite recent events, both payouts appear safe for now. The Luton-based budget airlinessdividend will becovered twice by earnings. IAGs iseven more securewith dividend cover at 3.5.The fact thatthe latterhas now agreed to make annual payments of 300m for the next 11 years to plug its pension deficit, while continuing to grow its payout, is also likely to reassure investors.
All this leadsme tothink that these airline stocks look tempting at the current time.
The best bit? This report is absolutely free to Foolish readers.
Paul Summers owns shares in easyJet. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
