- European airlines noted a sustained recovery in bookings in June, despite concerns about the delta variant.
- Bank of America predicts a 52% recovery in revenues, which will provide a particular boost for low-cost carriers.
- We list the bank’s top picks from among the major airlines right now.
The coronavirus pandemic has destroyed airline revenues, so the gradual reopening of the economy had given investors some hope about the sector until the onset of the surge in cases of the delta variant of COVID-19 in the last few weeks.
The variant, which is highly contagious, has prompted a series of new lockdowns and other restrictions on movement across major countries in the Asia-Pacific region, including Australia, Japan and Thailand, and even wreaking havoc in heavily vaccinated countries such as the UK.
The airline industry, which a year ago was on its knees, would appear at first glance to be, once again, at risk.
However, in a research note this week Bank of America noted a “sustained recovery” in June booking figures and projected revenues to improve from 18% to 52% of pre-crisis levels by the end of the summer.
“While Q2 will likely be another quarter of low capacity and revenues… we think the market should look beyond this,” the bank’s analysts said.
“Key drivers for earnings and share performance will be the recovery in bookings and cash flows, the outlook for the reopening of European and Transatlantic travel, cost savings from headcount reduction and restructurings, and deleveraging from current high levels.”
However, the delta variant cannot be ignored, the bank said.
“During the pandemic, most airlines planned far more capacity than they flew, given the poor visibility on changing travel restrictions,” analysts said. “The second quarter of 2021 remained challenging for European airlines, with lockdowns and stringent travel restrictions for most of the period.”
Bank of America analysts are also predicting big increases in the cost of fuel and carbon – two key inputs. But as people regain the confidence and the ability to travel, some carriers will be able to pass on those increased costs.
EU carbon taxes are set to rise from 1% to 2.5% of revenue by the end of 2022 and the bank predicted airlines will respond by pushing up fares.
“Higher fuel and carbon costs (will) drive 2022 earnings revenues up by 5% on average as we expect these to be passed onto customers, particularly given pent-up demand to travel,” the analysts said.
Low-cost British airline easyJet is one of the bank’s top stock picks, with capacity expected to reach 71% of 2019 levels by the end of the summer.
Bank of America also recommended IAG, which formed in 2011 after a merger between British Airways and Iberia. IAG is particularly exposed to the transatlantic long-haul market, which represented 47% of the airline’s total capacity before the pandemic, and thus makes it best-positioned to benefit from the relaxation of travel restrictions.
“Our top picks are IAG and easyJet as the shares were impacted by a slower-than-expected UK travel re-opening,” analysts said. “We see the potential removal of quarantine for fully vaccinated travellers in the UK as well as potential progress on UK-US travel reopening as catalysts.”
Here are Bank of America’s top 4 airline stocks.
P/EPS ratio: 15.9x
Price target: €19 ($22.50)
Price target upside: 16%
Analyst commentary: “We will be looking for comments on full-year guidance and capacity plans, following a strong recovery in bookings in recent weeks… we expect Ryanair to gain market share as the industry recovers.”
P/EPS ratio: 11.7x
Price target: £5,500 ($7,580)
Price target upside: 16%
Analyst commentary: “As per its schedules, Wizz has the highest planned capacity of >100% of 2019 in the September quarter… we increase our FY23 target P/E to 14.5x (from 13x) to reflect strong growth.”
P/EPS ratio: 13.1x
Price target: £1,200 ($1,650)
Price target upside: 33%
Analyst commentary: “easyJet remains a top pick as we see a strong European leisure recovery this year and shares have underperformed low-cost rivals since the beginning of the pandemic.”
P/E ratio: 4.2x
Price target: £270 ($370)
Price target upside: 49%
Analyst commentary: “The easing of travel restrictions in the US, UK and Europe in 2021 should lead to a demand recovery. IAG is more exposed to lucrative transatlantic routes than its peers so will benefit more from a UK-US reopening.”