There is still room for further airline earnings recovery, says broker Liberum, choosing British Airways owner International Consolidated Airlines Group SA (LSE:IAG) as the top pick.
Demand in the sector is proving "resilient, despite a weak macro outlook", with capacity on European routes looking "restrained relative to other regions".
On a day when holiday group On The Beach said the premium segment has been strong but volumes in the value segment have not yet recovered to pre-pandemic levels due to cost-of-living pressures, analyst Gerald Khoo said constraints on the airline industry’s ability to add excess capacity "are the main factor in the demand/supply balance remaining favourable" and capacity plans for the summer "remain sensible".
Furthermore, earnings estimates for the year are being supported by weaker fuel prices and a weaker US dollar that has amplified the benefit in euro and sterling terms.
"The lag in the restoration of capacity relative to the economic recovery should mean there is headroom for profits to continue to recover, despite a lacklustre macro outlook," the analyst added.
IAG has a 'buy' recommendation from the broker and a target price of 350p, with the same 'buy' rating for easyJet PLC (LSE:EZJ) and its target upped to 690p from 650p, and also for Ryanair Holdings PLC (LSE:RYA), with its target also hiked to €19 from €17.
The BA owner's relative share price performance has made its shares more attractive than the low-cost carriers, Khoo said. "Our concerns about leverage have moderated, but this is not reflected in the valuation."