Just as the weather improves and thoughts turn to jetting away on summer holidays, an analyst goes public with concerns about the future of airline stocks. Here's what this City expert thinks of the sector.
Share price targets across the airline industry were slashed by a City bank today as it warned over the impact of rising fuel costs and weakening consumer confidence.
Deutsche Bank has lowered its targets on Europe’s six biggest players by a fifth on average, although British Airways and Iberia owner International Consolidated Airlines Group SA (LSE:IAG) has been cut by almost 30%, from 220p to 155p.
IAG shares were 178p in mid February but fell as far as 116p on 7 March after a surge in oil prices triggered by the Ukraine invasion delivered another setback in the industry’s two-year struggle to recover from Covid-19.
Airline shares are still far from their pre-pandemic levels, with those including Deutsche Lufthansa AG (XETRA:LHA), IAG and Air France-KLM (EURONEXT:AF) between 30% and 60% below February 2020 levels. The latest turbulence comes just as airlines were starting to benefit from the relaxation of Covid-19 travel restrictions.
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IAG shares rebounded to 145p last week but Deutsche Bank analyst Jaime Rowbotham sees little cause for further optimism as the elevated oil price will contribute to a squeeze on disposable incomes and leave airlines facing significant fuel costs.
He said: “We don’t expect the airlines to be able to pass all of the fuel cost headwind we now envisage on to customers, especially next year when those headwinds look set to be greater and by which time we think some of the pent-up demand for travel post the Covid-19 pandemic will have already played out.”
Deutsche Bank has cut its earnings forecasts for this year and next by 15% on average across the sector.
IAG’s annual results, which were released the day after Russia’s invasion of Ukraine, showed that the company’s fuel, oil and emissions costs fell 52% to 1.8 billion euros (£1.5 billion) in 2021. Employee costs were the biggest overhead at just over $3 billion (£2.5 billion).
In May, IAG introduced a new two-year jet fuel policy that allows hedging of up to 60% anticipated requirements in the first 12 months of that rolling period. IAG’s operating loss more than halved to 2.7 billion euros (£2.25 billion) last year.
Among the other airlines, Deutsche Bank has cut its easyJet (LSE:EZJ) target price from 680p to 570p. The Luton-based carrier’s shares were today 8.6p lower at 506.6p, compared with 727p on 10 February and 439.5p on 7 March.
Deutsche Bank has also removed its “buy” rating and cut its price target on eastern Europe-focused Wizz Air Holdings (LSE:WIZZ) from 5,450p to 2,900p. Its shares were today 10p cheaper at 2,546p.
Price targets are also being cut on Lufthansa, Air France-KLM and Ryanair, although the Dublin-based carrier continues to have a “buy” rating based on a new figure of 17.50 euros.
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