Shares in easyJet PLC (LON:EZJ), Ryanair Holdings plc (LON:RYA) and Wizz Air Holdings PLC (LON:WIZZ) have climbed from their lows in recent weeks but seeing risks from second waves of coronavirus, JPMorgan Cazenove has cut its targets for the trio.
However, while Ryanair's share price target was trimmed to €15.30 from €16.75, analysts at the investment bank upgraded the Irish budget airline to ‘overweight’ as there was still more than 40% upside seen to the current price.
“Significant risks remain,” the analysts wrote in a note to clients on Monday, namely “a potential return of COVID-19 across Europe, with unpredictable government responses; the likelihood of large losses in the winter season; and a weakened European economy”.
However, Ryanair and Wizz were highlighted as the most attractive European airlines, with strong balance sheets, the potential to grow through expansion and market share gains, and a likelihood that they will use the current crisis to cut costs.
For example, Ryanair is expected to use the current crisis to negotiate better terms from airports and, potentially, to place a major new order with Boeing “at a very attractive price”.
Wizz, which also on Monday released more details about its Abu Dhabi joint venture, was reiterated ‘overweight’ with a target price cut to €41.5 from €47 for what is seen as “as a core holding for European airline investors”.
Despite the huge disruption caused by COVID-19, the analysts see Wizz’s long-term structural growth story as “unchanged”, with its ultra-low costs and lower fuel prices enabling a return to robust double-digit margins in the next financial year and forecast to be carrying 18% more passengers in the year to March 2023 than in its past year.
As for easyJet, which was kept on a ‘neutral’ rating, it entered the crisis with weaker liquidity and lower margins than its budget rivals and while management has taken action on deferring capex, raising funds and slashing its headcount, the mid-point of its new fleet plan suggests that in the year to September 2023 it will have 9% fewer planes than last year.
“If EZJ can succeed in meaningfully reducing its costs this should lay the foundation for better future profits..[but] we believe this lack of medium-term growth makes the equity story less attractive”.
Staycation summer, say UBS and Barclays
Research published by UBS on Monday also indicated the majority of UK people will stay in the UK over the summer period, benefitting domestic carriers and 'staycation' locations.
Some 76% of respondents to its survey of 1,000 Britons said they still do not plan to travel outside the UK in the next three to four months, although this was down from 78% in a similar survey in April.
However, only 13% of people believe that the virus situation will improve by the end of summer, compared to 56% in April.
"Furthermore, only 21% of respondents plan to travel to countries elsewhere in Europe (vs 18% in April and 15% in May) and only circa 5% to countries outside Europe," the UBS analysts said. "We think this is positive for UK staycations with likely beneficiaries Whitbread (LON"WTB) and to a lesser extent easyJet."
In what was a busy day for airline sector coverage, Barclays also put out a note saying airlines focused on short-haul routes with people visiting family and going on holiday will do best from any recovery in air travel.
However, imminent second-quarter numbers from the sector will not be pretty, the analysts said: “With revenues across our coverage down 91% on average, we believe the focus for the quarter to be reported will be on cash burn versus guidance, reflecting each airline’s ability to reduce fixed cost bases and defer capex payments.”
But UK expenditure on air travel paints an encouraging early demand picture, they added, with spending now down 40% year-on-year compared to 78% in April.