easyJet PLC (LON:EZY) shares flew lower as Barclays downgraded its stance on the airline, citing a number of challenges facing the company and the rest of the sector in 2019.
In a note on European airlines, the bank said 2019 looks to be the “height of aviation demand uncertainty in recent years” as the UK prepares to leave the European Union in March.
READ: British Airways owner IAG, Ryanair and easyJet shares descend as Deutsche Bank points to risks facing airlines
“With various industrial and consumer-related indicators raising fears around the cycle and when we also take into consideration possible demand-related risk to traffic from political events such as Brexit, we think it reasonable to be cautious around the demand outlook for 2019,” Barclays said.
Weaker demand could put negative pressure on fares as airlines cut prices to entice customers, the bank said.
There are also concerns about tough competition in the short-haul flight sector and higher fuel costs following a rebound in oil prices.
easyJet lacks growth momentum, says Barclays
Barclays lowered its rating on easyJet to ‘underweight’ from ‘equal weight’ and cut its target price to 1,200p from 1,500p.
The bank said it thinks the growth profile for easyJet “lacks some momentum in our view, not helped by difficult comparables and possible UK demand related risk”.
“With a network that is focused on primary constrained airports, organic growth opportunities are limited, and the incremental revenue associated with these premium slots is currently being offset with incremental costs given the level of delays and disruptions associated with operating with constrained infrastructure,” Barclays said.
“The new initiative to tackle operational resilience is necessary in our view, and whilst they should help to offset further disruption in the future, they will likely come with some incremental capital expenditure and operational expenditure as the investment in resilience is made.”
READ: easyJet profits soar as it benefits from rivals' woes but shares fall on concerns about costs
Barclays said easyJet’s acquisition of collapsed Air Berlin assets at the Tegel airport show integration comes with challenges and takes time. The Tegel operations made a loss before tax of £152mln in 2018.
“Meanwhile, the plans for easyJet Holidays, business, loyalty and data are interesting, but again should result in near-term incremental operating expenditure with unclear quantum and timing of revenue upside,” Barclays said.
For the 2019 financial year, Barclays expects easyJet to post pre-tax profit of £543mln, compared to the £578mln reported last year.
“Although the fall in the fuel price, combined with the group’s hedging profile, means that there is little unit cost headwind for easyJet in FY19, the comparable revenue base is particularly challenging with c£80mn in one-offs,” the bank said.
“Although most of this will unwind in H1, we expect a partial effect in Q3, whilst summer capacity growth is still unknown, the demand environment is uncertain and given falling fuel costs potentially being competed away.”
Shares in easyJet dropped 1.8% to 1,171p in afternoon trading.
IAG remains 'best in class'
Elsewhere, Barclays said it continues to hold the view that British Airways owner International Consolidated Airlines Group PLC (LON:IAG) offers fundamental value and is the “best in class airline operator”.
Barclays maintained an ‘overweight’ rating on the stock but cut its target price to 700p from 780p, noting that in the short term, the group faces some uncertainties and less momentum than was seen in 2018.
READ: British Airways parent IAG sees annual profits €200mln up on last year
“The airline industry as a whole faces the most uncertain demand environment for some time, and as a largely UK business that reports in sterling, IAG faces additional risk related to Brexit from both currency translation and demand-related risks,” the bank said.
“Additionally, we note that 2019 is likely to be a slightly softer year for unit cost reduction delivery given planned BA opex investment, and rising capex for the fleet delivery plan.”
The bank expects IAG to report broadly flat profits in 2019, marking the softest momentum seen in recent years. However, it sees IAG achieving a 12% margin and a 15% return on invested capital, which is well above peers.
IAG shares rose 1.02% to 616p.
Ryanair the 'structural winner'
Barclays also kept an ‘overweight’ rating on Ryanair Holdings PLC (LON:RYA) but lowered its target price to €12.70 from €15.80.
“Although Ryanair’s cost base has been the major focus for investors over recent months, we hold the view that despite some labour cost inflation and productivity softening, Ryanair’s unit cost base will still remain best-in-class,” it said.
“We believe that management will continue to use the cost base advantage to drive the revenue growth story, with market share and network shift opportunities remaining.
“We continue to believe that Ryanair will be the structural ‘winner’ in a European market that is growing and consolidating.”
In 2020, Barclays expects Ryanair to post €1.17bn in net income, up 6% on the previous year, but it faces “amongst the easiest comparables in the sector due to the largely self-inflicted challenges in FY18 and FY19”.
READ: Ryanair profit slumps as strikes and fuel price hit
Ryanair was hit by a series of worker strikes last year after acknowledging unions for the first time, leading to a mountain of flight cancellations.
Shares increased by 0.8% to €10.13.