British Airways owner International Consolidated Airlines Group SA (LSE:IAG) and other major European airlines slumped after a more cautious view of the airline sector was put forward by JPMorgan, which cut ratings and slashed price targets.
Against a backdrop of potentially weaker economic growth, the investment bank highlighted the potential for large increases in seat capacity, which could bring revenue per passenger-mile yields down.
The investment bank prefers low-cost carriers such as Ryanair Holdings PLC (LSE:RYA) to the networks due to capacity constraints which could aid pricing.
It thinks the long-haul supply picture looks more difficult given network capacity increases in particular on Transatlantic while lower margins and elevated fuel/ex-fuel cost pressure mean unit revenues are unlikely to grow.
Balance sheets and valuations do not look overly stretched; however, earnings pressure could send stocks lower, in the broker’s opinion.
JPM moved IAG to ‘underweight’ from ‘neutral’ and Lufthansa and Air-France KLM to ‘underweight’ from ‘overweight’ with its top sector pick Ryanair – rated ‘overweight’ – where it noted superior pricing, best-in-class margins, and growing net cash.
The broker has nearly halved its price target for IAG to €1.45 from €2.80, Lufthansa's target is cut to €7.50 from €12.00 and Air France to €9.50 from €21.50.
The bank remain 'neutral' on easyJet PLC (LSE:EZJ) and Wizz Air Holdings PLC (AIM:WIZZ).
Shares in IAG fell 3.6% to 155.65p, Lufthansa fell 4.4% to €8.20 and Air France dropped 5.9% to €11.92.