British Airways owner International Consolidated Airlines Group SA (LSE:IAG) and other European airline shares could have further to rise as lower fuel costs and resilient travel demand improve the sector's earnings outlook heading into the second half of the year, according to UBS.
The Swiss bank said investors had become more constructive on the sector over the past month, helped by a sharp decline in oil prices and growing confidence that consumers remain willing to spend on travel despite economic uncertainty.
UBS believes the next key test will come during the second-quarter earnings season, beginning with Ryanair Holdings PLC (LSE:RYA) results later this month, when airlines are expected to provide fresh guidance on summer bookings and pricing.
UBS also pointed to signs of greater capacity discipline across the industry.
Long-haul capacity growth in the third quarter is now expected to be around 3%, down from previous estimates of about 4%, potentially supporting ticket prices and profitability.
Lower fuel costs could also provide a meaningful boost to earnings. Jet fuel prices have fallen sharply from recent peaks, easing one of the biggest pressures on airline margins.
Analysts added that any further de-escalation in tensions in the Middle East could provide an additional tailwind by allowing airlines to restore services and reduce disruption to flight paths.
After a strong recovery in airline shares over the past month following the US-Iran ceasefire, with IAG shares up 17%, the bank said the sector's next move will depend on whether companies can demonstrate that demand remains robust and translate lower fuel costs into stronger profits.
IAG has around 70% of its fuel requirements hedged, according to UBS, placing it in the middle of the peer group.
