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European airline stocks ready to take off again with IAG leading the way - Deutsche Bank

European airline stocks have fallen by around a fifth since the first half results season - and now look oversold, according to Deutsche Bank analysts

BA owner IAG is Deutsche's top sector pic ahead of its Q3 results on Friday

Deutsche Bank has upgraded its recommendation on “oversold” European airlines and said British Airways owner International Airlines Group (LON:IAG) is its top pick in the sector.

Many European airline stocks have been hit by negative sentiment concerning high oil prices, cautious industry comment around yields and worries over the supply and demand balance required for the upcoming winter season.

READ: British Airways owner IAG to expand long-haul operations from Vienna with Level airline

“EU Airline shares have fallen around 18% since the first half results (season), underperforming the market by some 10%, and now look oversold,” Deutsche Bank analysts said in a note to clients, adding that, as a result, they see a buying opportunity and have upgraded the European airlines sector to ‘overweight’ from ‘underweight’.

Having rebased its 2019 forecasts for unhedged oil at around US$85 a barrel, Deutsche Bank expects airlines to be able to at least sustain profitability next year and forecasts underlying profit (EBIT) growth of 2%.

“The assumptions required to get there don’t seem too demanding, and a disciplined approach to capacity deployment with a supportive macro backdrop could even result in upside,” they added.

IAG the 'top pick'

The German bank said Iberia owner, IAG, was its top pick in the sector and upped its target price to 770p from 750p ahead of its third-quarter results on Friday.

Deutsche analysts expect IAG’s third-quarter numbers to be in line with its expectations (EBIT of €1.435bn) and to be accompanied by positive commentary on transatlantic yields and its ability to recapture rising fuel costs as some of its US peers have done recently.

“We see IAG's multiple airline brands with specific customer offerings as facilitating a level of flexibility and efficiency that should allow it to approach future opportunities and risks from a position of strength,” the analysts said, maintaining their ‘buy’ recommendation on the airline group headed by Willie Walsh.

Positives for German carrier Lufthansa are driven by benefits that will emerge from the integration of Air Berlin, while the results of Air France-KLM’s self-help measures could boost the stock.

Low-cost concerns 

The German bank is less bullish on the prospects for Europe’s low-cost carriers and expects fuel headwinds, lower yields and – in Ryanair’s case – union issues to weigh on them in the short-term.

As such, the bank cut Ryanair (LON:RYA) and Wizz Air’s (LON:WIZZ) target price by a fifth to €13.90 and £32.50, respectively, and chopped easyJet’s (LON:EZJ) target price by a quarter to £14.40.

Quick facts: easyJet plc

Price: 1058.7675 GBX

Market: LSE
Market Cap: £48.4 m

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