Demand for airlines and airports may look solid for now, but a downturn in 2023 is a big concern as higher prices crash into weaker consumer demand, according to JP Morgan.
A travel survey carried out by the investment bank is “supportive” for near-term demand but the big finding was that the cost of living is “an increasingly important issue, in particular with regard to long-haul flying”, while also hitting appetite for spending at airport retail facilities.
Leisure travel intentions in 2023 are at a similar level to pre-pandemic 2019, the survey found, while visiting friends and relatives travel intentions suggest 2023 could exceed 2019 levels, due to bottled up demand.
Business travellers were also found to be keen to resume flying again at similar levels to before the pandemic – “although virtual meetings are likely to result in lower business travel in the longer-term”.
JPMorgan sees continued air traffic recovery into the second half of the year, based on the “solid” near-term demand commentary, while 2023 airport traffic expectations still “look achievable, although we assess there could be risks to passenger demand” due to inflationary pressures on air fares meeting lower household spending.
“Although we expect airlines to report a strong Q3 due to high fares, looking forward, for the low-cost carriers we see a potential ‘perfect storm’ of high fuel, strong $ and a potential consumer squeeze,” said JPMorgan analyst Elodie Rall in a note.
She said she was concerned that this could erode profitability.
In contrast, the legacy airlines “could be more resilient in this environment” with premium passengers generally less price sensitive.
However, among London-listed airlines, Wizz Air Holdings PLC (AIM:WIZZ) was most favoured, with an ‘overweight’ rating and a share price target of 3050p, well above the recent 1,413.5p close.
British Airways owner International Consolidated Airlines Group SA (LSE:IAG) was given a ‘neutral’ rating, but a 140p price target would offer healthy upside to a recent closing price of 102.3p.
An ‘underweight’ rating was put on easyJet PLC, with the analyst noting that it has “has disappointed on cost control in the past”. It is given a 270p share price target versus a previous close price of 295p.
Airport retail could also be “squeezed”, the analyst said, which might be expected to hit the likes of WH Smith, SSP, and Restaurant Group.
“We generally see less downside risks to expectations in airports, where traffic and profitability are likely to be more resilient," the analyst concluded.