These Airlines Could Fly High
International Consolidated Airlines, Ryanair, and Aer Lingus boost profit guidance, as fuel costs fall and passenger traffic rises.
This sometimes turbulent sector has generated a spate of solid financial results as many airlines benefit from falling oil prices and some nab passengers from strike-bound rivals. French flag carrier Air France-KLM (ticker: AF.France) and Germany’s Lufthansa (LHA.Germany) have both suffered financially damaging strikes recently.
International Consolidated Airlines Group (IAG.UK), which owns British Airways, and Spain’s Iberia and Vueling, appears to be among the winners, along with Ireland’s Ryanair Holdings (RYA.Ireland) and Aer Lingus Group (EIL1.Ireland).
Budget airline Ryanair recently reported that higher fares and growing passenger numbers had pushed net profit up 32%, to 795 million euros ($992.47 million), in its crucial first fiscal half, when it generally makes all or almost all of its profit. Based on its expected passenger gains and further cost savings, the airline now expects full-year net profit of €750 million to €770 million, versus previous guidance of up to €650 million. The airline has moved slightly away from its no-frills, low-fare focus and is doing more to keep customers happy.
Cantor Fitzgerald transport analyst Robin Byde has Ryanair at Buy with a €10 target price, estimating its potential upside at 22%. Says Byde: “This winter, Ryanair will add more new bases and routes, including restarting services between London Stansted and Glasgow and Edinburgh to attract more business passengers. Germany, Italy, and France should also present ample opportunity for share gain….” The stock closed Friday at €8.30.
IAG’S THIRD-QUARTER OPERATING profit jumped more than 30%, to €900 million before exceptional items. It generated impressive profit gains on all three of its airlines. Like Ryanair, it was helped by falling fuel costs and the introduction of more fuel-efficient aircraft. It now expects full-year operating profit, before exceptional items, to be €550 million to €600 million above 2013’s €770 million. It previously had forecast that it would beat last year’s figure by €500 million.
Morgan Stanley analyst Penelope Butcher rates IAG Overweight, with a €6.25 price target. “IAG is striving to exploit changing demand through its cost structure, capacity planning, and supplier relationships. This nimbleness should allow it to ride the wave of cyclicality, rather than be swept under, and extract adequate profit,” she predicts. She adds that IAG is the first major European airline group to show the cost, capital and capacity discipline long practiced by low-cost carriers, such as Ryanair. AIG closed Friday at €4.03.
Aer Lingus’ third-quarter adjusted operating profit rose to €112.9 million from €94.9 million a year earlier. The carrier now expects 2014 operating profit, excluding one-off items, to exceed last year’s €61.1 million. It’s the second time the airline raised its guidance since issuing a profit warning in June. Back then, it reckoned that profits would be hurt by a threatened strike. The walkout, focused on pensions, was brief, and led to a pension-funding plan approved last week by the unions and likely to be cleared by shareholders in December.
Investec Securities analyst Gerard Moore has Aer Lingus at Buy with a €1.70 price target and notes that the quarterly results were the airline’s strongest since the financial crisis. Aer Lingus closed Friday at €1.61.