Pick#5 A bet in Airlines recovery !

Why Airline industry?

It was a while from adding additional new pick to our portfolio. Last weeks was adding more positions in existing picks. Be default, current prices of stocks indicate current conditions and if you can determine the future of a business, then future price will align with the future growth. For us, it is clear that airline industry suffered after 2020 and it is recovery and airlines are expanding hiring and even flight prices are increasing due to the increase of demand.

Based on IATA “The International Air Transport Association” report published in June 2023, airline industry net profit expect to double in 2023 from $4.7 billions to $9.8 billions. Traveling people expecting in 2023 to reach nearby 2019 levels above 4.3 billions travelers. Total revenues are expected to grow 9.7% year over year to $803 billion. Based on IATA, the return to net profitability, is a major achievement to airline industry. Passengers revenues had increased +27% in 2022. For Europeans carriers, the net profit expect to increase from $4.1 billions to $5.1 billions. [Reference]

Which one we selected?

There are many airlines stocks recovered in its prices, so, we selected one that is still suffering in price with high possibility of continuous recovery. It is Air France-KLM SA. The risk that the company after 2020 Covid had suffered financially where it debts exceeded its assets value ! However that ratio had continuously improved in the last 2 years. Based on the same improvements, the airline can return positive equity in 2 years as presented in below graph by monitioring the improved difference assets and liabilities after 2020.

The price of the Air France-KLM had presented this issue, but neglecting the last 2 years improvements. The price of the stock was above $10 prior to Covid in 2019 and now it is below $2. Actually the stock is trading at one of its lowest prices as shown below. The bright side that the stock price is slightly recovery and already increased from lowest price mid of last year by almost 50% within a year. So, the stock fill our prime portfolio picks requirement of having stock with expected double in price within 2-3 years. Below is the price of the stock in 3 different time targets as provided by Google Finance.

Below is the yearly net income with the worst year being 2020, then continuous improvements till being in profit last year. The revenues also growing in good shape.

Air France-KLM SA (AFLYY)

Air France-KLM SA, is a multinational airline holding company formed by the merger of Air France and KLM Royal Dutch Airlines in 2004. The company is headquartered in Paris, France, and Amsterdam, the Netherlands. Air France-KLM is one of the largest airline groups in the world, providing passenger and cargo transportation services globally.

The merger of Air France and KLM in 2004, created a major European airline group, combining the strengths and resources of both companies. AFLYY faced financial difficulties due to rising fuel costs, intense competition, and economic downturns. The company implemented various cost-cutting measures and restructuring programs. AFLYY also expanded its presence by acquiring stakes in other airlines such as Alitalia and Virgin Atlantic. The company also formed strategic alliances with Delta Air Lines and China Eastern Airlines to strengthen its global network.

The major shareholders of AFLYY included both institutional investors and individual shareholders. Some notable institutional investors holding significant positions in AFLYY were the French government, Delta Air Lines, and China Eastern Airlines.

Pros and Cons of AFLYY

a) Pros:

• AFLYY is a well-known player in the global airline industry, benefiting from its extensive network and brand recognition.
• The company has formed valuable partnerships and alliances with other major airlines, expanding its reach and improving its competitiveness.
• AFLYY generates revenue from both passenger and cargo operations, reducing reliance on a single source of income.

b) Cons:

• The airline industry is highly sensitive to factors like fuel prices, geopolitical events, and economic downturns, which can negatively impact AFLYY’s financial performance.
• AFLYY faces operational challenges such as labor disputes, regulatory hurdles, and disruptions due to natural disasters or health crises, which can disrupt its services and affect profitability.

Conclusion

Air France-KLM is financially in not good position after 2020 airline halt due to Covid conditions. However, the company is returning to profitability from last year. It is expected to continue on the same making the stock at current prices attractive for future. Actually the PE ratio based on 2022 profit is just 5.5 which also considered affordable, keeping in mind that airline industry average is 13.5. That means Air France is trading below half of its industry. In addition, Air France-KLM expected growth is above 17%.

Regarding our portfolio, it is improving, but still below major indexes as shown below and we will continue improving our holding to beat them. Our portfolio in blue