Interactive Investor

Which aviation stocks are tipped for recovery?

2nd September 2020 14:49

Graeme Evans from interactive investor


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Despite the UK’s quarantine list growing, one bank has picked three airlines it thinks can soar back to health.

Frequent changes to the UK's quarantine list have not deterred one City bank from backing Ryanair (LSE:RYA), easyJet (LSE:EZJ) and BA owner International Consolidated Airlines Group (LSE:IAG) as stocks to play an aviation recovery.

Today's note from UBS on Europe's airlines and airports sector highlights “some share price green shoots” after the battering seen since Covid-19 travel restrictions were imposed.

Its analysis forecasts a reduction in long-haul capacity across this year of 50%, but with the fourth quarter likely to be some 24% lower as demand hopefully improves. For short-haul flights, capacity in the peak summer quarter is likely to be down 50% before an improvement to 12% in the forthcoming quarter.

The bank, which hosts its 25th annual transport conference next week, has ‘buy’ recommendations on IAG, Ryanair and easyJet, with price targets of 290p, 1,170p and €13.50 (£11.9) respectively. Germany's Lufthansa is rated as a ‘sell’ by the bank.

The note said:

“While the sector year-to-date has seen material share price pressure, we could see some share price green shoots (albeit slow) as network recovery takes place and investors pivot portfolios into 2021.”

The potential for an aviation sector recovery was downplayed yesterday by counterparts at JP Morgan, with the Wall Street bank cutting its rating on IAG to ‘neutral’ due to the carrier's long-haul exposure, particularly in riskier Covid-19 locations in the Americas.

Its analyst David Perry warned:

“As we enter autumn we are tactically cautious on all airlines as we expect fading leisure traffic and only anaemic business traffic."

Uncertainty over the UK's quarantine list has continued, with travellers arriving from Greece having to self-isolate for 14 days in Scotland but not those returning to England.

A recently-established travel corridor between Portugal and UK is also in doubt after a rise in cases in the popular tourist destination. France, Spain and Switzerland are among other countries already on the UK's quarantine list.

Low-cost carrier Ryanair disclosed today that it carried seven million passengers in August, compared with almost 15 million for the same month a year earlier. It has operated at about 60% of its normal August schedule, with a 73% load factor.

London-listed European airline Wizz Air (LSE:WIZZ) had 2.38 million passengers last month, a drop of 41% after reducing its capacity by 20% to 3.36 million seats. It continues to expand its network, however, with new bases at Doncaster and Gatwick and the addition of four new Airbus A320s to take its fleet to 130 aircraft.

It is confident that it will emerge “as a structural winner” from the Covid-19 crisis, but warned yesterday that overall capacity may have to stay at around 60% if mobility restrictions across its network persist. This may result in Wizz having to park some of its fleet throughout the winter season in order to protect cash balances.

IAG, which also has the Iberia and Aer Lingus airlines, has already unveiled plans to raise up to €2.75 billion to strengthen its finances and hopefully see out the pandemic.

The shareholder fundraising is being supported by its biggest investor, Qatar Airways, which owns 25% of IAG, and is subject to approval at a shareholder meeting on Tuesday. IAG had hoped to be flying at around half of its capacity by July, but is instead only managing around a fifth or 20%.

IAG shares were 2% higher at 204.5p today, compared with around 165p at the start of last month. EasyJet shares have also improved from less than 500p at the end of July to 608.2p today, while Wizz Air has improved from 3,216p to 3,674p.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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