British Airways owner International Consolidated Airlines Group PLC (LON:IAG), Ryanair Holdings (LON:RYA) and easyJet PLC (LON:EZY) have been downgraded by Morgan Stanley due to an uncertain outlook for the economy, foreign exchange and oil prices.
“Global macro momentum is slowing, oil price and US dollar movements still appear to be challenging headwinds, Brexit and trade relations carry overhang in both business and leisure segments,” Morgan Stanley said.
IAG 'least preferred' airline stock
The investment bank said IAG is its least preferred stock of the sector as it cut its recommendation to ‘underweight’ from ‘equal weight’ and lowered the target price to €6.50 from €7.00, citing growing concerns on topline momentum, cost headwinds and allocation of capital.
Morgan Stanley noted that IAG is the middle of labour negotiations with unions, which are pushing for higher profit shares and employee share schemes.
"We think this could be a source of cost pressure relative to the labour trends the group has enjoyed the past few years," it said.
IAG also still has to resolve its position on post-Brexit ownership rules and compliance with EU law on foreign ownership. Questions have been raised on whether the complex holding structure of IAG, which also owns Vueling, Aer Lingus and Iberia, will meet EU ownership and control criteria to maintain operating licences after Brexit.
easyJet exposed to Brexit risks
On easyJet, Morgan Stanley said the airline is vulnerable to Brexit risks as it has about 33% of total traffic exposure to the UK and there is no agreement in place for the aviation industry yet.
"Thus, in a competitive environment combined with macro risk, we move easyJet from ‘overweight’ to ‘equal-weight’," Morgan Stanley said.
The bank cut its target price on the stock to 1,290p from 1,600p to reflect a weaker ticket yields environment, particularly in the first half of 2019 a tough comparative year-ago period and extra capacity in the market.
Ryanair cut to 'equal weight'
Morgan Stanley also downgraded Ryanair to ‘equal-weight’, and maintained the same rating for Wizz Air Holdings PLC (LON:WIZZ), as it awaits “clearer outcomes on Brexit developments and summer capacity evolution”.
Ryanair’s target price was cut to €11.50 from €16.00 with Morgan Stanley pointing to key risks including: Demand being hit by macro, terrorism, weather or pandemic events; Ryanair underpricing fares to gain market share; competitors cutting fares to take share away from Ryanair; overcapacity in markets; higher fuel costs; and currency movements against the euro, including a stronger US dollar and weaker pound.
Looking at Wizz Air, Morgan Stanley raised its target price to 3,250p from 3,200p to reflect changes to fuel and currency assumptions and December traffic exit rates.
Risks for Wizz Air include wage inflation, higher oil prices, foreign exchange headwinds and Brexit, the bank said.