British Airways owner International Consolidated Airlines Group (LON:IAG) is expected to report a strong first quarter despite the challenges facing the sector.
Deutsche Bank esimates the company will on 5 May report underlying earnings (EBIT) of €179mln compared to €111mln the same period a year earlier. Full year EBIT is forecast at €2.7bn, up from €2.5bn the prior year.
“In our view IAG remains the best positioned legacy carrier group in Europe and should see a strong year of earnings (as Vueling laps a difficult 2016 summer, very constrained group capacity in the third quarter)and free cash flow generation,” the bank said.
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Deutsche reiterated a ‘buy’ rating and raised its target price to 620p from 540p, saying it deserves a premium to its legacy carrier peers since it has more a more efficient cost base and more profitable presence on the transatlantic.
However, the bank noted downside risks to the share price include an unexpected deterioration in premium traffic or a weaker pound against the US dollar as Brexit negotiations get under way.
The concern is that the slump in the pound may deter UK residents from flying abroad given the extra expense of poor exchange rate.
Shares in IAG fell 0.65% to 531.50p in morning trading.
Deutsche Bank raises EasyJet's target price..
Sector peer EasyJet plc (LON:EZJ) also faces the possible impact of more cautious consumer spending due to rising inflation, Deutsche Bank said. A further recovery in oil prices will also raise fuel expenses.
Deutsche repeated a ‘hold’ rating on EasyJet but lifted its target price to 1,125p from 915p, saying it believes earnings momentum is on the “cusp of stabilising or even turning positive”.
EasyJet reports its first half results on 16 May and Deutsche Bank expects a headline first half pre-tax loss of £197mln, compared to a loss of £24mln the previous year. For the full year it expects a pre-tax profit of £368mln, down from £495mln in 2016.
“In our view risk on easyJet forecasts looks like it may turn positive (from a low floor) but uncertainty remains too high. Hold.”
The bank also cautioned on management’s multiyear capacity growth plan.
“We think this is driving a degree of nervousness for two reasons; (i) operating cash flow is highly unlikely to cover gross capex (never-mind the dividend) for the next few years and (ii) easyJet is adding significant capacity into a European narrow-body market that itself is projected to see significant capacity growth.”
Shares in easyJet rose 0.19% to 1,062p in morning trading.