Flybe concerns are 'overdone', HSBC expects airlines to self-heal

Analysts at HSBC upgraded low-cost carrier Flybe to 'buy' on Tuesday, noting that the value of the firm's assets seemed to have been "ignored" since its profit warning in late October.

HSBC said that confidence in the group “appears weak” and also noted that it felt the two-thirds drop in Flybe’s share price since the profit warning appeared “overdone”.

The London-based bank said it felt the market was “uncertain over the prospects for the business” in light of unit revenue challenges into winter as competitive capacity increased from Belfast and on London-Scotland routes.

Although rising fuel costs and the roll-off of GBP/USD hedges also appeared to be weighing on sentiment, HSBC expects the market to self-heal in time.

“We expect the European airline industry to moderate capacity with weak airlines failing, M&A seeing carriers combine and surviving carriers moderating their schedules to enable unit revenues to rise. We expect this to also play out in the UK regional market,” said HSBC.

With Flybe set to report its first-half results on 14 November, HSBC thinks that earnings expectations will likely have been adjusted following the airline’s profit warning.

“We expect management to present its action plans to improve the performance of the business. As explained above, the company has assets that have value but which we think the market is currently ignoring.”

HSBC reiterated its 20p target price on Flybe.