Bernstein initiates easyJet, IAG at 'outperform'

Bernstein sounded a cautious note on the European airlines on Monday, telling clients that the strongest phase of the cycle was now past.

The broker had a more constructive view on Postal & Logistics, saying it liked the fundamentals of the sector.

Yet most of that was already priced-in.

From among the former, the broker initiated its coverage of Easyjet (target price: 1,600p) and IAG (taget price: £7.1) at 'outperform' but Ryanair (target price: €14), Lufthansa (target price: €15.4) and Air France-KLM (target price: €8.1) were all started at 'underperform'.

Favourable economic growth and reduced fuel costs would help sustain a plateau in airlines' operating profits but at 12.5% they had nevertheless reached a peak.

Passenger growth would continue apace at about 3% a year but seat capacity was running ahead in parallel at 5%, Bernstein explained.

Hence, there were just too many planes around, it said.

"Ryanair is doomed to grow and will be forced to dilute its business model and the remaining legacy groups will be short-term losers. For Lufthansa time is running out and Air France-KLM has turned from innovator to laggard.

IAG on the other hand could protect its network, Bernstein said, while easyJet was building "castles and moats" at key European bases.

Regulatory uncertainty in the wake of Brexit was the chief concern in the near-term, but on a more medium-term view the main threat was disruption from on-line business models dis-intermediating between them and their clients.

"The only escape for them is to adopt a new operating model separating commercial and operating layers, enabling them to fast forward consolidation."

The outlook for Parcels & Logistics on the other hand was "positive", according to the broker.

It was benefiting from e-commerce-driven demand for parcels, fatter margins driven by specialty logistics and global economic growth.

Within the space, Deutsche Post, Kuehne and Nagel and Royal Mail (target price: 400.0p) were all initiated at 'market perform'.