Major airlines find lift as budget carriers feel squeeze

After years of losing out to no-frills airlines such as Ryanair and easyJet, premium carriers including BA, Lufthansa and Air France-KLM are gaining momentum.

A British Airways aircraft descends to land at Heathrow Airport. The airline, along with other premium carriers, is doing better than its budget rivals like Ryanair and easyJet. Toby Melville / ReuterShow more

After years of losing business to discount airlines, the major carriers in Europe are gaining strength and outperforming in stock markets.

Deutsche Lufthansa and International Consolidated Airlines (IAG), which owns British Airways, surged more than 19 per cent in the first quarter. Air France-KLM Group, up 37 per cent, is having its strongest quarter in three years. In contrast, discount airlines Ryanair is little changed and easyJet up 2.5 per cent for 2017.

That’s counter to the longer term trend – Ryanair’s five-year annualised return is 29 per cent versus about 9 percent for Lufthansa.

While Air France-KLM, IAG and Lufthansa have given better than expected guidance on revenue trends, helped by buoyant long-distance flight demand, Ryanair and easyJet have been cutting fares due to competition on European flights, and have reduced profit forecasts, or turned more cautious.

Major European airlines are “upbeat on improved trading” and “optimistic” about ticket-pricing trends, said the Barclays analyst Oliver Sleath. The brokerage raised estimates for earnings before interest and tax (ebit) for Air France-KLM by 70 per cent for this year while lifting Lufthansa’s adjusted ebit projection by 30 per cent.

The full-service airlines may also appeal to bargain hunters. Air France-KLM trades at about five times expected earnings per share, and IAG at seven, while Ryanair and EasyJet trade at about 12 times.

To be sure, some analysts say the share gains are overdone. Bank of America Merrill Lynch analysts on Monday downgraded IAG and Air France-KLM to underperform from buy, saying both face risks on short-and long-haul traffic. For the French carrier, the analysts also cited limited likelihood of the company raising its cost saving targets in the near-term due to the French elections.

* Bloomberg

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