RBC downgrades IAG on risk of greater economic uncertainty

Analysts at RBC downgraded their recommendation on shares of IAG, saying the company now faced economic and stranded capital risk.

Regulatory issues aside, the broker now saw potential for economic uncertainty, and hence reduced travel demand.

Similarly, should the UK’s economic role decline, then ‘premium’ travel demand would also take a hit, its analysts said.

“Airlines live and die by the economic outlook and for IAG, with 67% of ASKs in the UK and Ireland, will face added uncertainty following the UK’s referendum result,” analysts Damian Brewer and Andy Jones said in a research note sent to clients.

Brewer and Jones expected the carrier to respond to any weaker demand with route cuts, frequency cuts and cost cuts (staff) and – at the margin – capital reallocation.

One silver lining for the airlines was that a weaker sterling would help deliver more competitive home airport and staff costs and purchases of fuel denominated in US dollars, for example.

RBC also referenced the risk that the company’s financial multiples might shrink should the UK experience a protracted economic, political, and constitutional crisis.

The broker downgraded the stock from ‘outperform’ to ‘underperform’ and lowered its target price from 660p to 400p.