Airline stocks: new price targets for IAG and easyJet

International Consolidated Airlines Group SA (LSE:IAG) has kept the support of a leading City bank after it downgraded its European airline price targets on the back of a 120% surge in spot jet fuel prices.

Despite the current challenges, Deutsche Bank believes that the British Airways and Iberia owner is still capable of delivering margins that are comparable to those of its other European airline Buy pick, Ryanair.

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The bank cut its price target on IAG shares from 500p to 460p, which at this afternoon’s price of 344.7p represents an upside of 33%.

The shares were 457.3p on the eve of annual results on 27 February, when IAG posted an operating margin at the top end of 12-15% medium-term guidance. This compared with about 5% at Deutsche Lufthansa AG (XETRA:LHA) and 6.5% at Air France-KLM (EURONEXT:AF).

The results reflected a helpful post-Covid backdrop for all EU airlines as they benefited from declining unit fuel costs as well as strong growth in demand and capacity constraints.

The Middle East conflict is now likely to result in margin contraction this year as airlines struggle to fully pass on a massive increase in jet fuel prices.

The spot price has risen by more than 120% since the start of the conflict to $1,800 per metric tonne (m/t), leading Deutsche Bank to increase its assumption for unhedged exposures from $720 m/t to $1,060 m/t for the remainder of 2026.

This is the main driver of its earnings and target price downgrades, which today resulted in Sell rated easyJet (LSE:EZJ) being cut from 465p to 340p. The low-cost carrier’s shares were today 14.9p lower at 352.3p, having fallen by about 25% since the start of the war.

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While direct exposures to the Middle East and other potentially impacted locations such as Cyprus vary across airlines, the bank expects bookings to all destinations to take a hit for a period of time.

Airlines will look to raise fares, which the bank expects will offset about 25% of the hit from higher fuel costs. IAG is also diverting some of its long-haul capacity from the Middle East to the likes of India, Bangkok and Hong Kong.

Deutsche Bank adds that it may prove easier for European network carriers to pass on fuel increases on long-haul rather than short-haul routes, given the pockets of undersupply that already existed and the lack of fuel hedging by competitors such as US legacy carriers.

Airlines hedge a mixture of their jet fuel, gasoil and Brent requirements, with Deutsche Bank’s current IAG estimate pointing to a position of 64% for the second quarter and 58% in the third.

It said it had been surprised by the reaction of IAG shares to the conflict, having underperformed compared with declines of about 10% for Ryanair and Lufthansa at 16%.

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The bank added: “That Ryanair’s shares have been most resilient makes total sense to us - it has least direct exposure to the conflict regions, best fuel hedging, low operational leverage and the lowest financial leverage.

“The more surprising moves for us are in IAG which we’d have expected to be more resilient, and in Lufthansa which we’d have thought might have underperformed given the high sensitivity of earnings to a rising jet fuel price.”

It said it thinks that IAG can still deliver an operating margin similar to Ryanair at between 12-15%, alongside the generation of material free cash flow in support of shareholder returns.