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easyJet and IAG shares: summer high-flyers or victims of inflation?

IAG and easyJet are both managed by CEOs convinced of a summer travel boom. But as the cost-of-living crisis continues to escalate, their expected boom risks becoming a whimper.

The easyJet (LON: EZJ) share price and IAG (LON: IAG) share price are two of the most closely watched stocks on the FTSE 350.

Both are worth far less than their pre-covid-19 pandemic values, and both are subject to similar risk factors that could dent their hoped-for recoveries.

And those hopes appear firmly placed on the all-important summer travel season.

easyJet and IAG share prices: summer success factors

1) Summer boom

In their most recent results, easyJet CEO John Lundgren forecast a ‘strong summer ahead, with pent up demand that will see easyJet returning to near 2019 levels of capacity.’ And IAG CEO Luis Gallego was ‘confident that a strong recovery is underway’ expecting ‘a robust summer with IAG returning to around 85% of its 2019 capacity for the full year.’

After two years of restricted travel, pent-up demand could see revenue soar.

2) Cost-of-living crisis

However, UK consumers are grappling with the worst cost-of-living crisis on record, with living standards predicted to fall by 2.2% this year. Bank of England governor Andrew Bailey has warned of a ‘historic’ energy shock to consumer finances, ‘larger than every single year in the 1970s.’

Energy costs are rising by 54% tomorrow, Consumer Prices Index inflation is at 6.2%, and the bank rate has already risen to 0.75%.

easyJet and IAG will be competing with fellow operators for diminished consumer disposable income. However, IAG will likely be hit harder as a predominantly long-haul operator.

3) Cost of jet fuel

Brent Crude is at $113 a barrel, $43 above its $70 average of last year. The oil price direction is subject to intense debate in the lead up to summer; with the US, Saudi Arabia, and Canada pledging to increase output to counteract the increasing ostracization of Russian oil as well as the short-term closure of the Caspian pipeline from Kazakhstan.

However, IAG CFO Steve Gunning has said the airline’s jet fuel is 60% hedged for this year, pointing out that ‘the last time the oil price touched $100 a barrel, the group achieved an operating margin of 14.4%.’ easyJet is 60% hedged, but only to 30 September. This of course covers the crucial summer period, with hopes of price stabilisation in the latter half of 2022.

4) Russia-Ukraine war

European Tourism Association CEO Tom Jenkins has said ‘the recovery trend for arrivals to Europe since January from long-haul markets has been strong, particularly from the US market. Demand from the States is currently holding up, except for destinations such as Russia, Ukraine and neighbouring countries. This may change.’

With IAG controlling the lucrative Heathrow to JFK route, it stands to be a prime beneficiary of this recovering US demand. And CEO of its British Airways brand, Sean Doyle, has played down the impact of the crisis. ‘All of our services are carrying on with minor routing changes,’ and as affected regions are ‘on hold’ they will not affect the summer outlook.

However, travel guidance for some countries bordering Ukraine has changed. And many consumers will remember the deaths of 298 people aboard Malaysia Airlines flight MH17, after it was shot down by pro-Russian separatists in Ukrainian airspace in 2014.

The war could sway decisions for many travellers already weighing covid-19 concerns against their desire to holiday. Olivier Ponti at ForwardKeys believes ‘destinations close to Russia will suffer as consumers will fear the proximity of war, even if that is irrational, based on no declared threat from Russia.’

And despite Russia’s promise to ‘drastically’ scale back military operations around Ukrainian capital Kyiv during peace talks, the bombardment is continuing.

5) Covid-19 pandemic

Hertfordshire's Executive Director of public health, Jim McManus, has warned ‘the pandemic is not over,’ with UK cases rising to over four million people this week. Free lateral flow tests have been scrapped along with almost every other precaution, leaving the UK unprepared if a dangerous new variant appears.

For example, when the Omicron variant hit in November, it caused a collapse in flying demand and sharp share price falls for both easyJet and IAG. China is a case in point; tens of millions are back in lockdown, including in financial capital Shanghai.

In Europe, the four-million strong Ukrainian refugee crisis could soon cause havoc. Only 35% of Ukrainians are fully vaccinated, and many of those vaccinated either lacked access to Omicron-effective jabs or have not had boosters. Amid the chaos in Eastern Europe, a new wave could rapidly spread.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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