EasyJet PLC (LON:EZY) stands to benefit from a consolidation of the short-haul flight industry and a stronger euro against the pound, analysts at Morgan Stanley said in a note to investors on Friday.
Morgan Stanley upgraded its rating on easyJet to ‘overweight’ from ‘equal-weight’ and raised its target price to 1,725p from 1,490p, saying the airline joins Ryanair Holdings PLC (LON:RYA) as its preferred stocks for 2018.
In December, EasyJet confirmed it will buy part of collapsed Air Berlin’s operations at Berlin Tegel Airport. The acquisition of the operations, including runway slots and 24 aircraft, will make easyJet the leading airline in Berlin.
"As the best hedged name in the sector for 2018, combined with leverage benefits from the Air Berlin slots in Germany, we believe pricing momentum can gradually improve and hence move from ‘equal-weight’ to ‘overweight’," said Morgan Stanley.
"Our price target moves up owing to expectations of strong outturn in FY18-19 revenue per seat (from 2% to 2.5% on average) and currency tailwinds in the US dollar offsetting the upward move in the oil price curve."
Following the collapse of Air Belin and Monarch last year, Morgan Stanley expects capacity growth in short haul operators to taper, reducing competition for the industry and supporting stronger pricing.
Morgan Stanley said easyJet is targeting market share gains from legacy airlines at primary airports. However, this could provoke “price antagonism” from these legacies, leading to yield pressure.
"EZJ is also challenged to raise yield sufficiently to offset the higher cost of primary airports," it said.
"Volatility in fuel prices, and the key exchange rates of the USD, EUR and CHF could drive variance from our forecasts, albeit hedging programmes are utilised to mitigate a portion of risk."
Shares rose 4.4% to 1,580p in afternoon trading.