Airline stocks fly lower on Deutsche Bank downgrades

DB said it looks like winter will be challenging for the airlines, with capacity data suggesting intra-European growth of around 8% over the next six months – levels that are at decade highs.

The same is true on the transatlantic, where capacity is growing around 9% over winter.

“History suggests adjustments to overcapacity can take at least six months. This time the adjustment may take even longer. In short-haul, EasyJet and Ryanair are unlikely to give up attractively priced delivery slots (indeed Ryanair’s CEO said it would only give up its 787s in an “Armageddon” scenario).

“In long-haul the question is whether there are any channels other than North America that can absorb material capacity redeployment.”

Deutsche Bank said demand was unlikely to be able to support these levels of capacity.

“We believe corporate travel budgets remain extremely constrained and early indications suggest only a mixed September bounce-back in activity. Airline promotional activity also seems unseasonably high which is generally not a good sign. Ramifications post-Brexit and the upcoming US elections may also temper traffic.”

The bank downgraded Air France-KLM and Lufthansa to ‘sell’ from ‘hold’, EasyJet and Ryanair to ‘hold’ from ‘buy’ and kept International Consolidated Airlines Group at ‘buy’.

Deutsche said IAG and RYA are still its preferred stocks in the space. It reckons IAG has been sold off far too aggressively on Brexit concerns, adding that management continues to actively pursue structural cost reform of every line item.

As far as Ryanair is concerned, it said the company has unmatched cost control in the space and digital developments that are sector-leading.

“We firmly believe it is a medium-term winner, but in the short term we see its significant capacity addition finally resulting in lower-than-expected pricing.”

As far as Air France and Lufthansa are concerned, it said that with the “happy days” of oil-based gains over, thoughts will again turn to whether the airlines can kick-start structural cost reform.

Deutsche said EasyJet is struggling to keep its cost base from inflating and yields unfortunately seem to be continually under pressure from FX and external events.

At 0926 BST, Ryanair shares were down 1.1% to €12.61, EasyJet was down 1.5% to 1,133p, Air France was down 3% to €4.93, Lufthansa was off 4.2% to €10.34 and IAG was down 0.7% to 396.30p.