As the summer months edge closer, millions of Britons will be preparing for their annual holidays abroad. While international travel is still lower than at its prepandemic heights, ABTA, the UK travel industry association, predicts that 68% of Britons intend to take an overseas holiday in 2025.
Low-cost airline easyJet EZJ has already seen passenger growth for this year’s first quarter leap by 7%, while Ryanair RYAAY has carried 55.5 million passengers in first-quarter 2025, a 10% increase on the 50.4 million it sent on their travels this time last year.
Still, there are fears that US President Donald Trump’s tariffs could derail the recently booming travel industry. This would be yet another headwind for an industry that in recent years has struggled to not only recover from the covid-19 pandemic, but also the global cost-of-living crisis, oil price shocks, and a plethora of natural, human-made, or technological crises. In March, Heathrow Airport suffered a major power outage, which cost British Airways £40 million.
Now, the worry is that a global recession, triggered by the US trade war with China, could have another damaging impact on companies operating in the travel sector. The question is whether there are undervalued investment opportunities for investors in the sector despite the uncertain outlook.
Can EasyJet and British Airways Maintain Their Dominance?
Low-cost airline group easyJet EZJ and International Consolidated Airlines Group IAG, the owner of British Airways, Iberia, Aer Lingus, and Vueling, are undoubtedly susceptible to shifts in global tourism.
If Trump’s tariffs are held for the long term, consumer spending and in turn demand for international travel is likely to see a slump, which would have a knock-on effect on airlines.
Ian Lance, cohead of Redwheel Value & Income team, believes, though, that the main knock-on effect from Trump’s tariff blitz will be a reduction in the growth rate of earnings, rather than a drop in absolute terms in passenger numbers. And he says the airlines that are financially robust will be best placed to weather any storm that blows their way.
“What protects airlines during downturns are strong balance sheets [and] excellent market positions in their core routes. This enables them to retain passengers as weaker competitors retreat,” he says.
Lance points to easyJet’s strong position in its core European Tier 1 airports: London Gatwick, London Luton, Milan Malpensa, Amsterdam Schiphol, and Barcelona-El Prat. Meanwhile, IAG is a key player on a number of trans-Atlantic routes—to North America with British Airways, and South America with Iberia—giving it an advantage in the marketplace.
“IAG also has other sources of earnings, from its profitable and less economically sensitive premium offering, its growing credit card and loyalty business, and its maintenance, repair, and overhaul business,” he adds.
IAG has had a strong start to the year, beating analysts’ expectations. In the first quarter of 2025 it posted a pretax profit of EUR 239 million, a significant improvement from a loss of EUR 87 million in the same period the previous year. Revenue rose 9.6% to EUR 7 billion between January and March, while the British Airways and Iberia owner’s operating profits also jumped from last year’s figure of EUR 68 million to EUR 198 million.
One plus side of the global economic uncertainty is a drop in oil prices, with benchmark Brent crude currently trading at $65 a barrel, down 15% this year so far. Redwheel’s Lance says that as aviation fuel prices come down, that will offset softer demand, to an extent, as fuel prices account for as much as a fourth of an airline’s cost base.
“It might also be worth noting that, so far, the data is not showing clear weakness yet. Premium and trans-Atlantic bookings are reportedly strong, and UK consumer spending so far this year shows that spend on airlines, as a proportion of total card spend, is the highest since 2019,” he adds.
IAG recently announced that it would be expanding its long-haul fleet by ordering 53 new Airbus and Boeing aircraft. IAG expects to deliver the upgraded fleet between 2028 and 2033, showing their bullishness on long-term demand for long-haul travel. After the US-UK trade deal on May 9, British Airways bought 32 new Boeing planes.
Currently, 5-star International Consolidated Airlines Group is trading at 312.46p, below Morningstar’s fair value estimate of 410p.
British Airways Buys From Boeing, EasyJet From Airbus
For Simon Murphy, portfolio manager of the VT Tyndall Unconstrained UK Income Fund, easyJet may miss out on the worst impacts of supply chain shocks, as it sources airplanes from European aerospace corporation Airbus AIR.
He believes that the effect of tariffs is a short-term phenomenon, and he is especially bullish on easyJet because of the expansion of its holiday business.
The package holiday division was central to easyJet’s pretax profits for the year to the end of September 2024, reaching £610 million, up from the £455 million reported a year earlier.
“They have caught a trend that more and more people like to build their holiday packages. They have been able to leverage their customer data and their net access to the people that are booking flights directly through them to be able to offer them hotel packages as well,” Murphy says.
The low-cost airline is pushing for longer leisure routes to North Africa and the Canary Islands, which are becoming key revenue generators for the company in the quieter winter months.
However, for first-quarter 2025, the low-cost airline reported a loss of £61 million before tax, despite seeing an uptick in passenger growth of 7%. Yet, overall group revenue for the quarter stood at over £2 billion, including £1.25 billion from passenger revenue and £247 million from its growing holiday division.
Tyndall’s Murphy argues that easyJet, like most UK stocks, is undervalued, but that the airline looks particularly cheap; currently trading at a lower level than during both the covid-19 pandemic and the global financial crisis in 2008.
In Murphy’s view, the disproportionate selloff, triggered by Trump’s tariffs, is providing the perfect buying opportunity.
EasyJet’s share price is currently 528.2p, below Morningstar’s fair value estimate of 640p.
Is Cruise Liner Carnival Undervalued?
According to Morningstar senior equity analyst Jaime M. Katz, Carnival CCL is a 5-star stock trading well below Morningstar’s fair value estimate. In her view, the stock is fairly insulated from market volatility as the cruise liner is already booked to 80% of its capacity for 2025.
“If you think about vacations, you are planning them, let’s say, six months out. So, the risk of having a significant down tick in demand that flows through to the income statement this year is low. But what’s happening is that people are looking at what this means for 2026 and beyond. And if there is increasing consumer hesitancy, given the evolving rhetoric of the US administration, there could start to be some softness,” Katz says.
She says Carnival is not immune to the negative impact of a drop in consumer sentiment, especially if the global economy does go into recession. But she says, Carnival’s diversified offering may put it in better stead to weather an incoming storm.
“The interesting part is that the total enterprise has brands across the income spectrum. You have Princess Cruises, which has an older and more affluent price point. Then you have Carnival US, which maybe targets a little bit of a lower-income consumer. That portion of the brand is probably where we would see the most softness, because the lower-income consumer might be pulling on the purse strings a little bit tighter.”
Despite the cruise operator reporting first-quarter revenue of $5.8 billion, beating analyst estimates of $5.75 billion, the stock is currently down 23.79% year to date and is trading at £14.85, significantly below Morningstar’s fair value estimate of £23.90.
While the business acknowledges it could face an impact from heightened geopolitical volatility, Carnival CEO Josh Weinstein has predicted 30% earnings growth this year.
Is Rolls-Royce’s Travel Bull Run in Jeopardy?
UK stock Rolls-Royce RR straddles the very different worlds of travel and defense: it makes jet engines for commercial airliners and for military aircraft such as the Typhoon fighter. The boom in European defense stocks, as the continent ramps up security spending, has helped stocks like Rolls-Royce. The postpandemic travel boom has also helped demand for its products.
The stock has a one-year total return of 82.93%, making it the third-highest-returning stock in the Morningstar UK Index over that period.
Rolls-Royce said it will reach its target of between £2.7 billion and £2.9 billion in both underlying profits and cash flow in 2025, two years earlier than expected.
Despite geopolitical uncertainty the firm is continuing its rebound, which started when travel resumed postpandemic and since Tufan Erginbilgiç took the helm. Since his arrival as CEO of Rolls-Royce, the company has added £54 billion to its market value. Rolls-Royce is expected to announce its half-year results for 2025 in July.
Andrew Evans, portfolio manager of the Sanlam Active UK Equity, will be keeping a close eye on whether Trump’s trade war will damage Rolls-Royce’s global supply chain. But in line with Morningstar analysis, Evans agrees that Rolls-Royce is currently undervalued, “creating a margin of safety” for the business.
“We are slightly more sanguine about what is going on. This is a business that is operating very well, and things look like they are going to be getting better. But [aerospace] is extremely complex so it will probably take a while for the impact of tariffs, if and when they are applied, to be worked out.”
Evans points out that before Trump’s tariffs, Rolls-Royce had been expanding its manufacturing capability in the US, with a plant in Indianapolis, Indiana, becoming a central manufacturing, assembly, testing, and engineering hub for the UK firm.
“The company has mentioned that tariffs would impact them, and they would then have to try and pass through pricing onto their customers. So, it is negative for the business. The problem is we do not have concrete knowledge right now as to what, if any tariffs are going to come in,” he explains.
“I would say it is a net negative. The feeling we have is that it’s a very good business. It’s a very important industry and is trading cheaply relative to what it’s worth. We do not think that tariffs negate the investment case.”
Rolls-Royce recently saw another boost to its share price after British manufacturers garnered some relief from the US-UK trade deal, which cut tariffs on cars, jet engines, and steel. Year to date, the stock is up 33% to 781.4p but below Morningstar’s fair value estimate of 970p.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
