The outbreak of conflict in the Middle East presents International Consolidated Airlines Group SA (LSE:IAG) and other major European airlines with a paradox: a short-term revenue opportunity that could quickly turn into a longer-term drag if the fighting proves difficult to resolve.
That is the central argument in a new note from JPMorgan, which looked back at previous geopolitical shocks including the Gulf wars, Russia's invasion of Ukraine and the Israel-Gaza conflict to assess how the current situation might play out for carriers such as IAG, Ryanair Holdings PLC (LSE:RYA) and Lufthansa (ETR:LHA).
European airlines' direct exposure to Middle Eastern routes is relatively small, the bank's analysts said, meaning the near-term demand hit from that region is limited.
More interesting is the indirect effect. With transatlantic travel potentially facing some softness as American consumers grow cautious, European carriers – many of which hedge their fuel costs more aggressively than US peers – could actually benefit from stronger pricing power on those routes, with British Airways owner IAG identified as the biggest potential winner.
At the same time, passengers who would normally travel to or through the Middle East are expected to redirect their plans, accelerating demand on Europe-Asia routes.
Lufthansa is best placed for Europe-Asia rerouting, said the analysts, while rerouting within Europe itself would be Ryanair's ballpark.
The significant caveat, however, was that all of this analysis assumes a relatively short conflict.
A prolonged war that keeps oil prices elevated and erodes consumer spending power would ultimately be negative for the entire sector regardless of near-term routing effects, JPMorgan said.
With that uncertainty in mind, the bank highlighted Ryanair, down 14% year to date, as the most defensive play in the sector given its low-cost model and strong hedging position.