There are few businesses more global than the airline industry. Much of this is caused by the core of the airline business and which is providing worldwide travel thereby necessitating large carriers to maintain a global presence to effectively compete. Of course airlines have carved out their particular areas of strength, often around geographical presence. To provide a more global view on the airline industry, this article will explore some of the largest airlines that are headquartered in Europe.
Britons and Spaniards
Among the largest airline companies in the world is International Consolidated Airlines Grp (LON:IAG), an airline holding company formed by the merger of British Airways and Spanish carrier Iberia. Although the airline offers flights to worldwide destinations, its crown jewel is in London itself at the London Heathrow Airport.
Heathrow is the airport to use if one is conducting business in London’s financial district and as a result of this, and Parliament’s refusal to expand the airport in 2010, slots at Heathrow are prized possessions in the airline industry. Fortunately for International Consolidated Airlines Grp (LON:IAG), British Airways brought plenty of Heathrow slots to the company making IAG the leading owner of Heathrow slots. As a demonstration of the value of these slots, Delta Air Lines, Inc. (NYSE:DAL) purchased a 49 percent equity stake in Virgin Atlantic for $360 million largely to gain access to the slots. Delta Air Lines, Inc. (NYSE:DAL)’s believes that to maximize the potential of its large New York presence it needs to offer more New York to London flights and the joint venture with Virgin gives them this opportunity.
On the earnings side, International Consolidated Airlines Grp (LON:IAG) is trading at around 90 times estimated 2013 earnings. While this is a very high P/E ratio, investors should look beyond the 2013 numbers and see the expected increase in earnings in 2014 and the years following. Using today’s share price, shares trade at a much more reasonable 9 times 2014 earnings and 6 times 2015 earnings. Considering the economic uncertainty in Europe, the cyclical nature of the airline industry means International Consolidated Airlines Grp (LON:IAG)‘s earnings estimates are by no means set in stone. However, based on current estimates, IAG appears fairly valued for its industry when investors consider long term earnings.
French and Dutch
International Consolidated Airlines Grp (LON:IAG) is not the only multinational airline company that is European based, Air France KLM can trace its roots back to Air France and Dutch carrier KLM. The airline has been reporting losses since 2009 as the European side of the financial crisis has dampened air travel demand. Despite this, analyst estimates at 4-traders.com are calling for the airline to post positive earnings for 2014 with earnings increasing in the years beyond. This earnings situation shows Air France KLM as an opportunity to play a recovering European economy from the side of air travel.
While earnings growth is critical to Air France KLM, the airline’s book value is far higher than the current share price giving a value play on this airline. Airlines, especially legacy ones, often have low or negative book values due to large debts and other obligations but Air France KLM proves an exception to this rule trading at less than half of its book value. This is not to say the shares will double tomorrow but the book value does provide a positive look at what’s inside the airline.
Air France KLM also stands to benefit from Delta Air Lines, Inc. (NYSE:DAL)’s Virgin Atlantic purchase since it may bring Virgin into the Skyteam alliance of which Air France KLM is a member. However, investors will need to consider the possibility that Virgin will remain on its own and only take on the joint venture with Delta Air Lines, Inc. (NYSE:DAL) in place of joining the alliance.
While International Consolidated Airlines Grp (LON:IAG) and Air France KLM are European based, the networks they are based around are worldwide in nature. Through a series of airline alliances, IAG is able to codeshare with American Airlines (and soon US Airways which is expected to be merged with American) and Air France KLM runs codeshares with Delta Air Lines, Inc. (NYSE:DAL) allowing it to take advantage of the network of one of the world’s largest carriers. For investors willing to take on the risks associated with the airline industry, IAG and Air France KLM offer a way for U.S. based investors to diversify their holdings in a global industry.
The article A Look At Foreign Airlines Part One: Europe originally appeared on Fool.com and is written by Alexander MacLennan.
Alexander MacLennan owns shares of Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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