BoA downbeat on airline sector, downgrades IAG

Analysts at Bank of America sounded a downbeat note on the outlook for the airline sector, but were quite bullish on freight stocks.

Airline profits were expected to rebound in 2022 but remain below pre-crisis levels due to "plenty" of capacity on hand, which they said would weigh prices and airline margins.

A rebound in short-haul demand was anticipated in summer 2022, yet competition was also set to intensify, dragging on prices.

Furthermore, headwinds from dearer fuel and higher air traffic, and airport fees might offset gains from restructuring efforts.

In long-haul, transatlantic demand was expected to continue recovering but a shift in capacity from Asian routes was expected to pressure margins and corporate demand was seen remaining "tepid".

Regarding airlines' liquidity position, the investment bank said that it was "sufficient" but pointed out how leverage had "soared" during the crisis, adding that it was "difficult to rule out further capital raises amid the potential return of travel restrictions owing to new variants."

Against that backdrop, they saw fit to downgrade their recommendation for shares of IAG from 'buy' to 'neutral', although RyanAir was kept as a 'top pick', alongside DPDHL, Maersk and Royal Mail.

"Tight" freight markets on the other hand were expected to persist in 2022 with a normalisation anticipated in 2023-24.

Demand for ocean freight in particular was expected to be "robust" with BoA singling out Maersk for its near 30% free cash flow yield.