Credit Suisse downgrades EasyJet, IAG as airline stocks hit turbulence

It was bad day for airlines, with corporate releases from Deutsche Lufthansa and EasyJet giving investors little to get excited about.

EasyJet posted a drop in revenue per seat and total revenue for the third quarter amid difficult trading that was hit by the terror attack in Brussels and the Egyptair tragedy and said the outlook was uncertain. Meanwhile, Lufthansa downgraded its profit forecast for this year as terror attacks hit bookings.

And the bad news kept coming as Credit Suisse downgraded EasyJet and International Consolidated Airlines.

The bank cut EasyJet to ‘neutral’ from ‘outperform’, slashing the price target to 1,130p from 1,491p after the update, as it slashed its full-year 2016 pre-tax profit estimate by 24% to £528m.

“EZJ is a structural winner, well positioned to ultimately benefit from UK market turmoil as weak demand pressures weaker competitors lacking EZJ's cost structure and balance sheet. Yet earnings estimates clearly need to come down across the market and distinct uncertainty around 2017E, where we model a 2% profit before tax decline versus 5.5% growth per Reuters, prompts us to downgrade.”

CS also cut its stance on International Consolidated Airlines Group to ‘neutral’ from ‘outperform’ and trimmed the price target to 439p from 529p, saying Lufthansa’s profit warning highlights deteriorating pricing trends.

Following Lufthansa's warning, Credit Suisse cut its second-half unit revenue forecasts for IAG from a 4% decline to a 7% decline at constant currency, which compares to Lufthansa’s 8-9% guidance driven by weaker demand on long haul routes.

This drives down the bank’s 2016 EBIT estimate by 11% to €2.5bn and its 2017 EBIT forecast by 17% to €2.1bn.

“We continue to view IAG as a compelling medium term self-help story. However escalating revenue risk is likely to drive material downgrades for 2016E-2017E over the coming months.”

At 1220 BST, EasyJet shares were down 6.6% to 1,053p, IAG was down 3.6% to 405.40p and Lufthansa was off 7% to €10.31.