What the City thinks about IAG and easyJet shares

Sentiment towards the airline sector continues to improve, and current valuations appear inexpensive. Graeme Evans explains the thinking behind this analyst’s latest ratings.

19th September 2024 15:33

by Graeme Evans from interactive investor

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The ascent of International Consolidated Airlines Group SA (LSE:IAG) and easyJet (LSE:EZJ) following a 20% surge for their shares in the past month has been backed to continue after a City firm hiked price targets for the two FTSE 100 airlines.

Bank of America sees a further upside of 14% to 240p for the British Airways and Iberia owner IAG, with easyJet now forecast to land 31% higher at 685p.

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The bank’s improved stance on the wider European airline sector follows evidence of improved fare trends during August and a 10% decline in jet fuel prices in the past month.

It has lifted its earnings estimates for this year and next by an average 3% and 7% respectively, although this excludes the FTSE 250-listed central European carrier Wizz Air Holdings (LSE:WIZZ).

Industry sentiment has improved since Ryanair warned in July that it expected fares to be materially lower than last summer.

The bank’s discussions with airlines suggest fare trends improved in August after the weak July, leading it to forecast a largely flat year-on-year performance in the third quarter.

This is backed up by Wednesday’s inflation report for the UK, when the Office for National Statistics (ONS) said air fares rose by 22.2% between July and August.

Prices usually rise between these months, but this was the second largest such increase since the monthly collection of data began in 2001. Last year, air fares fell by 2.1% between July and August, the first decline outside the Covid affected summer of 2020.

Recent trends in jet fuel prices are the other tailwind, with Bank of America estimating that European airlines are 65-82% hedged for their consumption in 2024. It expects airlines to pass on some of these savings in ticket prices, lowering its yield forecast for next year.

Worries about stretched consumer wallets and the end of post-pandemic 'revenge travel' have contributed to a 14% year-to-date decline for European airline shares.

IAG has been the exception after a 34% rise, while the recent advance by easyJet means it is also higher this year and a continued member of the FTSE 100.

Bank of America regards current valuations as inexpensive based on its current 2024 estimates, with Deutsche Lufthansa AG (XETRA:LHA) the only stock trading above its historical average earnings multiple.

Lower profit estimates for 2025 mean the bank has cut its target price on Wizz to 1,500p from 1,740p. Expectations of a bottom-line improvement in 2026 underpin an improved earnings multiple of nine times, still below the historical average of 13 times.

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