Isn’t it astonishing how quickly oil prices have fallen? I can’t think of anyone who predicted a fall on this scale, though – as always – it seems obvious in hindsight. And I suspect this is more than just a blip; I think we have entered a new era of low oil, gas and mineral prices.
As I commute to work by car, I’ve already noticed the difference in my monthly spend. Many companies will benefit, including car makers and consumer goods companies. But the clearest winners are the airlines.
The airlines of most interest to UK investors are easyJet (LSE: EZJ) and International Consolidated Airlines (LSE: IAG). Let’s look at each company in turn.
easyJet
I bought easyJet at 1600p just a few weeks ago. Since then, the share price has already increased to 1862p. This is a company that was successful even when oil prices were high. Low fuel costs mean that profits will rise even more quickly.
You could argue that, as costs fall, more people will travel via premium airlines, but I think budget airlines will still be popular. After all, just as Aldi and Lidl has many wealthy shoppers, customers will always want to save money on their flights. And as no-frills airlines like easyJet have low costs, there is much scope to grow profits.
Earnings per share recorded and predicted show just how quickly easyJet’s profits are increasing:
2012: 61p
2013: 100p
2014: 113p
2015: 140p
2016: 157p
The share price has already risen a lot, as the company’s popularity has buoyed profits. But it is still reasonably priced, with a 2015 P/E ratio of 13.2, falling to 11.8 in 2016. The dividend yield is 3.0%, rising to 3.3%. So this company combines growth with a high yield, and is still a buy.
International Consolidated Airlines
I have also been thinking of buying IAG, the owner of British Airways and Iberia. This is a company that provides a premium service at a very reasonable price. IAG was at one point loss-making as it fought to turn around Iberia. But it is now highly profitable. And these profits are set to grow as gasoline prices fall.
I also think IAG’s takeover of Aer Lingus will boost earnings. IAG reduced its capacity during the era of high oil prices, when the aim was to fly just the most profitable routes. But when fuel is this cheap, and with a limited number of flight slots, you want to increase volume as quickly as you can. Expect there to be more mergers and acquisitions in the future as the airlines adapt to this new world of low energy prices.
The earnings per share progression gives an indication of how low fuel prices is affecting the fortunes of the airlines:
2011: 24p
2012: -29p
2013: 5p
2014: 28p
2015: 48p
IAG’s share price has also been heading skyward, yet with a 2015 P/E ratio of 11.1 and a dividend yield of 2.2%, this is, like easyJet, both a growth and a high-yield play, and for me is still worth buying into.
