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After years of losing business to discount airlines, the major carriers in Europe are gaining strength and outperforming in stock markets.
Deutsche Lufthansa AG and International Consolidated Airlines Group SA surged more than 19 percent in the first quarter. Air France-KLM Group, up 37 percent, is having its strongest quarter in three years. In contrast, discount airlines Ryanair Holdings Plc is little changed and EasyJet Plc up 2.5% for 2017.
That’s counter to the longer-term trend — Ryanair’s five-year annualized return is 29 percent versus about 9 percent for Lufthansa.
While Air France-KLM, IAG and Lufthansa have given better-than-expected guidance on revenue trends, helped by buoyant Ryanair and EasyJet have been cutting fares due to competition on European flights, and have reduced profit forecasts, or turned more cautious.
Major European airlines are “upbeat on improved trading” and “optimistic” about ticket-pricing trends, Barclays Plc analyst Oliver Sleath said in a March 30 note. The brokerage raised estimates for earnings before interest and tax for Air France-KLM by 70 percent for this year while lifting Lufthansa’s adjusted Ebit projection by 30 percent.
The full-service airlines may also appeal to bargain hunters. Air France-KLM trades at about five times expected earnings per share, and IAG at seven, while Ryanair and EasyJet trade at about 12 times.
To be sure, some analysts say the share gains are overdone. Bank of America Merrill Lynch analysts on Monday downgraded IAG and Air France-KLM to underperform from buy, saying both face risks on short-and long-haul traffic. For the French carrier, the analysts also cited limited likelihood of the company raising its cost saving targets in the near-term due to the French elections.
©2017 Bloomberg L.P.
This article was written by Chiara Remondini and Brian Lysaght from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to email@example.com.