A big current theme in the sector is the falling price of oil. Significantly, with fuel being such a big cost for airlines, the low oil price should translate into significant savings for a number of carriers. But Chancellor George Osborne is urging airline companies to pass that benefit on to consumers in the form of lower fares and has warned that government action could be on the cards if they fail to do so. Possibly with an eye on May's general election, he's also urging supermarkets to lower the cost of fuel at the pumps and energy companies to cut bills.
Despite that uncertainty, however, shares in easyJet (EZJ) staged a good recovery last year. Indeed, the group reported its fourth consecutive year of record pre-tax profits during 2014 - which rose more than a fifth to £581m. Chief executive Carolyn McCall put this success down to "discipline", both on spending and capacity plans. A falling oil price should add to the good news. As a budget carrier, a significant proportion of easyJet's operating costs are tied to aviation fuel, so its competitive advantages - such as lower staff costs - are further reinforced when fuel prices slide.
There was more good news for the airlines when the chancellor announced plans in the Autumn Statement to scrap air passenger duty for children under 12 (from 1 May next year). That means a £13 saving for each relevant air fare and, at the time of the announcement, industry experts said it could pave the way for the abolition of the duty altogether. easyJet's Ms McCall and International Consolidated Airlines (IAG) boss Willie Walsh publicly praised the move, although both are long-term supporters of scrapping the levy entirely as a means of stimulating growth for the sector through cheaper air fares.
Prospects for the sector's tourism companies, however, aren't quite so rosy, though. Harriet Green's shock departure as chief executive of Thomas Cook (TCG) in December 2014, for example, puts the travel operator's ongoing recovery in jeopardy. Even though the trading outlook barely improved during her tenure, Ms Green is credited with bringing the company back from the brink of collapse in 2012. Indeed, the group's share price recovered from roughly 20p when she joined the board, to a three-year high of 183p in February 2014. But year on year, and a couple of months on from Ms Green's departure, Thomas Cook's shares have fallen 31 per cent.
The industry also faces some consolidation. London-listed TUI Travel (TT.) - owner of travel company First Choice - and its German parent TUI AG are set to join forces after finally pushing through a long-mooted merger. The deal will create the world's biggest tour operator, with a combined market value of over £5bn. The enlarged company will enter the FTSE 100 in London, but maintain a secondary listing in Germany.
London's leisure and attraction companies, meanwhile, should be set for a positive 2015. Cinema chain Cineworld (CINE) is anticipating a strong film slate this year, with the latest instalments of the James Bond and Star Wars franchises set to provide a boost. The group certainly started the year well: this month it said profits for the year to 1 January would be "towards the top end" of current market expectations. Cineworld's domestic business held up well, too, considering the wider decline in the market last year. The company's box office revenues dipped just 0.5 per cent in the first half, compared with the market average fall of nearly 6 per cent.
Finally - and despite getting off to a rocky start as a listed company after November 2013's flotation - shares in theme park operator Merlin Entertainments (MERL) have started to take off. Indeed, the shares have risen 5 per cent since our buy advice (374p, 6 March 2014). The company's strongest brand is its Legoland theme parks, but it also runs a number of other tourist attractions, including various Madame Tussauds sites and Sea Life centres. It has expansion plans in the works in Japan and South Korea but, in the meantime, investors can enjoy the group's maiden 2p-a-share interim dividend, which was announced in August.
| Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| easyJet | 3,055 | 5,623 | 34.9 | 2.2 | 19.7 | Buy, 1,541p, 19 Nov 2014 |
| International Consolidated Airlines Group | 423 | 1,115 | 20.9 | 2.4 | 15.1 | Hold, 438p, 3 Mar 2014 |
| InterContinental Hotels Group | 1,647 | 6,542 | 14.4 | 2.8 | -3.7 | Sell, 2,274p 8 Aug 2014 |
| Millennium & Copthorne Hotels | 2,648 | 6,252 | 17.6 | 1.7 | 30.2 | Hold, 577p, 1 Aug 2014 |
| Carnival | 512 | 10,439 | 17.8 | 0.0 | 18.7 | Hold, 2,817p, 29 Dec 2014 |
| Cineworld Group | 406 | 4,120 | 19.4 | 0.5 | 11.5 | Buy, 410p, 14 Jan 2015 |
| Merlin Entertainments | 575 | 1,865 | 8.7 | 2.4 | -2.1 | Buy, 352p, 4 Aug 2014 |
| Thomas Cook Group | 128 | 1,869 | 11.3 | 0.0 | -29.0 | Buy, 109p, 26 Nov 2014 |
| TUI | 1,147 | 6,120 | 46.7 | 2.3 | NA | Hold, 445p, 5 Dec 2014 |
Favourites
Our favourites from this sector are easyJet, Cineworld and Merlin Entertainments. easyJet has proved itself resilient in a sector that was plagued by profit warnings last year and Cineworld's track record for growth and new exposure to fast-growth markets leaves it well placed. Merlin, meanwhile, has hit its stride as a public company and is now handing money back to shareholders.
Outsiders
Thomas Cook looks like a risky punt right now. While new chief executive Peter Fankhauser had been with the company for a number of years before taking the helm, the market didn't take Ms Green's departure well. In fact, the share price plummeted more than 20 per cent on the morning she announced her exit and confidence is still being rebuilt. TUI, too, deserves caution: the merger was predictable and will bring advantages, but the strategy for the newly enlarged business remains unclear.
