Hopes were high that the travel sector would get a boost from pent-up demand once lockdowns ended. Things haven’t gone quite to plan, so we look at prospects for this trio.
Investors who made International Airlines Group (LSE:IAG) one of 2020's most-bought stocks are facing more frustration after surging jet fuel prices contributed to shares falling another 5% today.
The British Airways and Iberia operator is barely 6p higher than where it started 2021, having been one of many people's new year tips to benefit from the reopening of the global economy.
Those bets looked to be on the money between March and June when shares were trading above 200p, but the performance has been largely downhill since then after the Delta variant of Covid-19 slowed summer bookings. Low-cost airline easyJet (LSE:EZJ) and holidays giant TUI (LSE:TUI) have also disappointed, with the pair having to tap investors for additional funds this autumn.
The long-awaited announcement that the US is reopening its borders for lucrative transatlantic travel from November helped IAG shares to rally from 137.1p in mid-September to 187.9p, but there's been a 13% reversal to 157p this week after cost pressures clouded the outlook.
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Berenberg and Peel Hunt have removed their “buy” recommendations, but Bank of America continues to offer support despite lowering its price target by 10p to 260p.
The bank is encouraged by high-frequency data showing that bookings across the European airline industry have remained strong even after the end of the summer period.
Its research note published today forecast overall airline capacity back to 72% of 2019 levels in the current quarter, which compares with 61% in the third quarter.
But Bank of America points out that European airlines are far more exposed to higher fuel prices than before the pandemic because they reduced their hedging during the crisis.
It added: “Historically, airlines have passed on fuel prices through ticket fares over time but it may be more difficult for them to pass on higher costs this year given demand is still recovering.”
More details will emerge in forthcoming earnings updates, but in the meantime Bank of America names IAG and easyJet as its top picks among the European airlines. Luton-based easyJet has a price target of 820p, but the shares were 27.2p lower at 586p in today's industry sell-off.
Wizz Air (LSE:WIZZ) also fell 180p to 4,281p, with the bank removing its “buy” recommendation due to challenges around the European carrier's ultra-low fares strategy at a time of rising fuel costs.
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Peel Hunt is now much less optimistic about IAG, however, after reducing its target price from 215p to 178p. Under the headline “Green light to US, red light on costs”, the broker estimates that jet fuel has risen 19% in a month and by about 25% in a year.
Even though US travel restrictions are set to ease for double-vaccinated passengers from 8 November, this release of pent-up leisure and business demand is happening later than the broker's original assumption for a September return.
Analyst Alex Paterson said: “We cut our forecasts by a significant amount as we do not expect yields to rise sufficiently quickly to mitigate the fuel cost pressure, which may worsen and be exacerbated by higher airport charges.”
Heathrow passenger charges now look set to increase by up to 56% from next year, which Paterson notes will leave BA paying much more than it does at other airports.
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