There’s a buyer of airline stocks despite more trouble for the sector

It’s been one of the worst-affected industries during the pandemic and it’s upset holidaymakers as well as investors over half-term. But one analyst thinks there are bargains to be had.

A chaotic summer at UK airports has left International Consolidated Airlines Group (LSE:IAG) and easyJet shares under more selling pressure as problems pile up for one of the last sectors to recover from the pandemic.

The half-term flight cancellations caused by staff shortages come on top of heightened worries around fuel and cost inflation and the wider economic slowdown. Jet kerosene, for example, is more than double the average price of 2021 in a further risk to earnings.

Whereas recovery hopes had been high for this summer, investors are now looking at year-to-date share price losses for all but Lufthansa in the European airline sector.

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The performance for the past month alone has shown a decline for IAG of 13.4% and a fall of 11.6% across 2022. Low-cost carrier easyJet (LSE:EZJ) is down 5.1% and 8.7% respectively.

The scale of the City’s caution is revealed in today’s weekly rundown of most-crowded trades published by UBS. The list of overweight stocks, where active holdings are greater than their benchmark weighting, is led by BP (LSE:BP.) but the low crowded list is led by IAG and TUI (LSE:TUI).

The line-up is potentially interesting as these stocks are liable to sharper movements should newsflow mean investors choose to unwind their positions at the same time.

However, the near-term outlook appears anything but positive as airlines continue to axe flights and Heathrow reportedly looks to limit bookings to manage overcrowding.

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UBS analysts reported today that short-haul capacity for the second quarter is up by around 155% on the previous year but still some 14% below the same quarter of 2019. Long-haul is up 125% on last year but down 29% on 2019 levels.

For the peak quarter starting in July, the City bank notes that long-haul and short-haul capacity is at 78% and 94% of summer 2019 levels respectively.

It continues to expect that demand will follow but warns of the risk posed by further spells of customer and operator frustration.

The bank said: “We think summer 2022 will be more comparable to summer 2019 should operators deliver on the summer promise. We continue to rate IAG, easyJet and Ryanair as “Buy”.

One encouraging sign for the industry came today from Barclaycard, which said credit and debit card spending with airlines grew by 6.6% month-on-month despite spiralling living costs and recent airport disruption.

UBS has price targets of 180p and 855p on IAG and easyJet respectively, while Wizz Air (LSE:WIZZ) has a neutral recommendation and target of 3,660p.