Merrill Lynch cuts Ryanair, highlights IAG's attractions

Bank of America Merrill Lynch downgraded Ryanair to an 'underperform' rating and instead tilted its joystick towards International Consolidated Airlines Group (IAG), where it nudged up its target price.

Merrill has taken on board an additional theme of increasing protectionism to its view of the European airlines, which it sees as likely to permeate through sector share prices in the coming six months, which it specifically believes will likely cause Ryanair shares to lag their peers.

"We see increasing evidence that European governments, specifically in Germany, are looking to protect their national legacy carriers, given their significant employee catchments.

"To serve this purpose, we think regional regulators may focus their attentions on Ryanair’s pilot staffing strategies in 2017, as a means of attempting to stifle Ryanair’s market share land-grab."

Merrill analysts think this threat of regulation will see the market begin to have some doubts about Ryanair's ability to seamlessly absorb market share "in a linear, sponge-like fashion" in the coming years, and so abandoned their former 'neutral' rating on the Irish budget carrier.

Meanwhile, IAG was reiterated at a 'buy' rating and its share price target lifted to 55p from 500p as analysts see the recent share price underperformance versus US airlines as unjustified.

Having resolved the recent pension discussions, IAG’s near-5% dividend is seen to have upside risks, while the market is expected to come around to the advantages of the British Airways franchise alongside the cost savings at Iberia and Aer Lingus.

That the shares trade for around six times earnings is "attractive, in our view, particularly given that consensus is conservatively assuming little/no EPS growth next year".