SocGen downgrades IAG to 'hold'

The bank said that while IAG has built a strong track record over recent years, over-delivering on cost-cutting and synergies, the market overestimates its earnings generation capabilities and the transatlantic market is becoming more competitive.

SocGen said it was cutting its earnings forecasts, mainly on the back of ongoing sterling weakness.

In addition, it highlighted "several worrying developments over recent months”, including uncertainty about the prospects for the British economy following the Brexit vote in June.

SocGen pointed out that British Airways contributes almost 75% of group profit. “The transatlantic market is becoming more competitive, as non-alliance carriers are expanding aggressively. And, most importantly, weak sterling will impair BA’s profitability (as the fuel bill is paid in US dollars) and will, on top, have a (translation) effect on group profits reported in euros,” it said.

The French bank also argued that the market forecast of flat earnings in full-year 2017 looks unrealistic. “We expect underlying margin pressure at BA, and unless the pound massively recovers from here, the translation effect will definitely weigh on earnings. Recall that IAG issued a profit warning on the day after the Brexit vote. Effects in its underlying business were not visible yet on that day, but the pound had fallen some 10%.”

At 1233 BST, IAG shares were down 2.5% to 412.10p.