Morgan Stanley worries most about IAG among European airlines
Morgan Stanley has downgraded European airline group IAG, citing uncertainties about its post-Brexit ownership structure and US expansion plans.
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In a note on European airlines, the bank has reduced its rating to ‘underweight’ from ‘equal-weight’, giving the Anglo-Spanish group – which owns British Airways, Iberia and Aer Lingus – the lowest ranking of all the European airlines it covers. The price target has been cut to €6.50 from €7.
The bank said: “We think there are developing risks on both the topline and costs/capex that may present headwinds to margins in the coming quarters.”
In particular, Morgan Stanley pointed to recent comments by US carrier Delta Airlines, which said there had been some “cautionary signs” in the March quarter. The bank said: “As IAG is growing its Atlantic seat capacity at over two times the rate of US peers, we think the RASK (revenue per available seat kilometre) risks could be more pronounced that consensus currently forecasts.”
Other concerns include ongoing negotiations with British Airways’ three main unions, which could be “a source of cost pressure relative to the labour trends the group has enjoyed the past few years”, and Brexit.
“IAG has to still resolve its position on post-Brexit ownership rules and compliance with EU law on foreign ownership,” noted the analysts. “We await updates from IAG directly on their position on this issue at the upcoming full-year results on February 28.”
Overall, Morgan Stanley said the sector was facing a number of issues, including slowing global macro momentum and movements in both the oil price and the dollar. It was therefore looking for “sector stories where there are elements of self-help that can help mitigate topline and commodity-based risks”.
It has upgraded Air France-KLM and Deutsche Lufthansa to ‘overweight’ as “the key self-help stories in 2019". But it switched easyJet and Ryanair from ‘overweight’ to ‘equal-weight’ alongside fellow low-cost carrier Wizz Air Holdings, arguing that it preferred “to await clearer outcomes on Brexit developments and summer capacity evolution”.