Nomura stays bullish on European airlines, singles out IAG as top-pick

Clear skies lie ahead for the European Airlines sector going into the winter trading period, thanks to a favourable outlook for capacity growth and given the considerable fall in oil prices since August 2015, Nomura said.

The global macroeconomic outlook, notably in the core UK and US markets, is also “sufficiently robust to support a bullish sector outlook”, the Japanese broker said in a research note sent to clients, “despite clear current political tensions in a number of territories that could hamper demand.”

The industry expects capacity growth to pick up from the benign intra-European summer (+4%) to +6% in winter.

However, analyst James Hollins saw no signs material risk of accelerated capacity expansion or yield pressures from the low price of oil on the horizon.

“We believe that each company’s management in our airlines universe has maintained solid levels of capacity discipline in recent history, and look for this to continue in order to support returns growth despite low current fuel pricing,” the analyst said.

Since the last time he took a look at the sector, in August 2015, the forward curve for Brent had fallen by $5 per barrel, equivalent to $50 per metric tonne for jet fuel, through to 2022.

Hollins therefore decided to revisit his 2016-19 assumptions for the cost of jet fuel utilising a spot rate of $600MT, instead of $650MT – although dollar strength since capped the upside from lower fuel prices.

The analyst bumped up his target price for IAG to 800p from 750p – singling out as its top-pick – “following an underlying and Aer Lingus-related upward revision to estimates”.