Goldman cuts Lufthansa to 'sell', upgrades easyJet

Looking ahead to the lifting of travel restrictions, the Wall Street bank said its preference was now for low-cost carriers over flag carriers.

It explained: "We forecast LCCs to be more profitable post-pandemic versus 2019, reflecting a fast volume recovery, lower industry capacity and a reduction in their cost base. The strong earnings growth we expect in the coming years leaves material valuation upside to normalised multiples."

The bank reiterated its ‘buy’ on Ryanair and upgraded easyJet from ‘neutral’, sending shares in both stocks higher.

However, it continued: "For the flags, the high cash burn through 2020/21 implies enterprise values are at or significantly above pre-Covid peak.

"While we believe IAG is operationally well-positioned - Atlantic exposure, competitive short-haul brands, cost cuts - at the current EV we see this is better reflected to valuation and downgrade to ‘neutral’."

It also cut its recommendation on Germany’s Lufthansa to ‘sell’ from ‘neutral’.

"Lufthansa is more exposed to corporate travel, has made limited progress on structural cost cuts in the airline and faces difficult union negotiations coinciding with the expiry of short-term work benefits at the end of 201," Goldman said.

"Its EV is 26% higher than in 2019, and its annual general meeting recently authorised an equity raise of up to €5.5bn."

As at 1230 BST, shares in easyJet were ahead 1% at 973.0p, while Ryanair was also trading 1% higher. IAG was down 1% at 200.2p and Lufthansa was off 2%.

Goldman Sachs expects travel restrictions within the European Union to ease faster than between the EU and UK. However, once travel restrictions are lifted, it believes short-haul will quickly recover.

Many European fleets will also be "significant smaller" than they were prior to the pandemic, meaning they are unlikely to experience the "material" fare deflation already seen in the US and China. Flag carriers are also more exposed to the structural reduction in corporate travel.