HSBC downgrades EasyJet and IAG after Lufthansa warning

HSBC downgraded its stance on several airline stocks on Wednesday as it turned more cautious on the sector after Lufthansa's profit warning earlier this week.

Lufthansa cut its 2019 outlook on Monday as it warned that market-wide overcapacities and "aggressively" growing low-cost competitors were putting pressure on yields in the European short-haul market.

HSBC said: "This comes despite the benefit of Easter and European capacity growth of only 4%, the lowest seen in Europe since the global financial crisis. Indeed, airline supply has only recently tightened with the 737 Max grounding.

"We conclude the problem is thus not excessive supply, but rapidly weakening demand. We think this is primarily driven by consumer confidence, with environmental sensitivities and the memory of last year’s hot summer playing supporting roles."

The bank cut British Airways and Iberia parent International Consolidated Airlines Group to 'reduce' from hold' and trimmed the price target to 400p from 550p. HSBC said it has "long-standing concerns" about IAG’s equity story, focussed on its building capex requirements to replace the British Airways delivery spike over the Millennium, its exposure to future competition on the North Atlantic, and its regulatory vulnerability to the complexities of Brexit.

"We are cautious about leisure revenues from the UK and for corporate travel strength from the UK. To Latin America, we expect Iberia will face challenging trading. In Europe, the new Level virtual airline is small, but its load factors appear weak and we think its unit revenues are soft," it said.

It also downgraded EasyJet to 'reduce' from 'hold', slashing the price target to 800p from 1,100p. While it admires the long-term equity story of EasyJet, HSBC noted that the airline faces "very challenging" revenue conditions in its largest UK market, as well as in its new Berlin base.

"They are probably also quite challenging across all its markets. During its H1 results, management conceded that the June quarter would be weak, but indicated that the company’s Q4 (YE September) should show better trends. We foresee a further profit warning from EasyJet," it said.

HSBC cut Finnair and Air France-KLM to 'hold' from 'buy', lowering their respective price targets to €7.50 from €8.50 and to €9.00 from €13.50.