British Airways owner International Consolidated Airlines Group SA (LSE:IAG) and Ryanair Holdings PLC (LSE:RYA) are top picks for Morgan Stanley amid diverging fortunes between long-haul and short-haul markets.
In short, analysts at the US bank envisage a potential oversupply of European short-haul flights.
Stronger supply "discipline" on transatlantic routes, particularly from the UK, where capacity is expected to fall by 2% this winter.
BA, as the world's largest premium and corporate seat carrier, accounting for 70% of IAG’s transatlantic seats, is seen as well placed to benefit from firm demand and "reinforced pricing power", while rivals Lufthansa and Air France-KLM face pressure from expanding US carriers and softer continental demand.
UK leisure markets, in contrast, face increasing pressure, with low-cost carriers including easyJet PLC (LSE:EZJ), Jet2 PLC (AIM:JET2) and Wizz Air Holdings PLC (AIM:WIZZ) expanding capacity faster than expected demand growth.
Morgan Stanley's analysts flagged that forward fares are already declining, with short-haul unit revenues turning negative into the past summer.
IAG and Ryanair were given 'overweight' ratings, citing their superior profitability and cash returns, with potential for further shareholder payouts.
Ryanair is forecast to deliver a free cash flow yield of 6.6% in FY25, ahead of peers, with IAG also seen trading at a steep discount to US carriers.
Jet2 and Wizz were rated 'equal-weight', while easyJet and Lufthansa are 'underweight', seen as more exposed to near-term earnings risks.