Having done a review of trends in the airline industry, Citigroup has advised its clients to plump for the less operationally geared names.
The two largest low-cost airlines, Ryanair Holdings PLC (LON:RYA) and easyJet PLC (LON:EZJ), make it on to the broker’s buy list as does British Airways owner International Consolidated Airlines Group (LON:IAG) – better known as IAG.
READ: easyJet and Wizz Air passenger numbers lifted in July
The new price target for Irish airline Ryanair is €16.80, based on “upside earnings revision potential” of 15% for fiscal 2020.
Citi reckons Ryanair is being highly tactical and restrained in terms of adding capacity.
In Citi’s book, that means Ryanair is well placed to benefit from any rise in fuel prices.
“Moreover away from fare pricing, we see the recent acceleration in ancillary revenues as being sustained through a number of near-term initiatives, in particular, the new incentive structure at Ryanair Rooms, baggage handling fee changes and legacy seat charging,” Citi said.
The airline has had its troubles in its relations with the unions but the broker believes they are now priced in.
In London, Ryanair shares were up 0.3% at 14.31p.
ATC Update - August 31st: pic.twitter.com/FbonBGUbKb
— Ryanair (@Ryanair) August 31, 2018
Similarly to Ryanair, Citi reckons easyJet’s earnings estimates are in line for a 15% upward revision.
It lists three reasons for its positive stance on the stock: near-term pricing momentum; medium-term synergy benefits from the Air Berlin deal; and a suspicion that management is being exceptionally conservative with its 2019 targets because of caution over the potential price dilution from the Air Berlin deal.
READ: EasyJet confirms acquisition of Air Berlin assets
One thing I don’t think a lot of British people realise is that all the ???????? Union Flags have been taken off every single EasyJet plane and replaced with a ????????.
EasyJet has re-registered as an Austrian business, to avoid leaving the EU.
What will the UK be left with? pic.twitter.com/7UVj0RRykA
— MrRemain is a very stable genius (@MrRemain) August 27, 2018
Citi has a price target of 1,800p for easyJet; the shares were up 0.6% at 1,537.5p on Friday morning.
As for IAG, the target price moves to €9.07 from €7.86, with the recommendation moving to ‘buy’ from ‘hold’.
Citi’s analyst sees “upside earnings review potential” of 16% for fiscal 2019.
The commentary from IAG’s US peers suggests pricing is still strong on North Atlantic routes in the corporate market, which is a core driver of profitability for IAG.
“The likely removal of Norwegian Air Shuttle from the market (both Lufthansa and IAG have made bids), could act as a consolidating force in the London market. There is a view amongst some in the market that IAG is out of the bidding process and will sell their stake imminently. We do not believe this will be the case, and see IAG as a significant beneficiary of any of the likely outcomes,” Citi said.
IAG shares currently trade at 694p, down 0.4p on the day.