European Airlines and Airports - Looking for the airline earnings base
* Continued downward pressure on share prices
YTD 2016, the MSCI EU Airlines index fell 36% with a c5% fall (Eurotop 300 –c6%) over the last 30
days with none of the airlines under our coverage in positive territory. We think that investors need to
see the earnings floor before they will become more positive on the sector. However, there is the
potential for further winter capacity moderation which may be viewed positively by the market. The next
catalyst for the sector we see is the UBS Travel and Leisure conference on the 12/13 September where
the six largest listed European airlines will present.
* Some further moderation in capacity with N Atlantic yields under less pressure
We have re-run the data for Q4 16 and Q3 16. The revised data suggests that Q4 16 long haul capacity
will grow by 6.1% (previous: 6.9%) while short-haul is expected to grow by 7.3% (Previous: 7.6%). Q3
16 data suggests long-haul capacity will grow by 4.8% (previous 5.1%) and short haul is expected to
grow by 5.3% (previous 5.5%). We expect that European airlines will continue to come under pressure
from investors to reduce capacity. N Atlantic yield pressure appears to be taking another step-down in
October and Q3 appears weak which is worrisome.
* H2 capacity growth looks mixed across the airports, some good, others less so
Airport seat capacity growth in Q3 looks solid at +6%. ADP should see lower but stable capacity increase
of about 3% while FRA struggles for growth at -0.4%. Q4 looks more promising for the sector as a
whole with indications at +8% on average, although Aena and Zurich Airport should lead the way with
growth of 14% and 9%, respectively. Capacity growth indications for Fraport buck the trend by showing
only marginal growth of 1.0% in Q4 (down from +1.4% last month) having been negative in Q2-Q3.
* Three Buy rated airlines despite cautious outlook, two Buy rated airports
We continue to be positive on Ryanair (Buy, €16.25), Wizz (Buy, £23.5), and IAG (Buy, 475p) while we
have Lufthansa (PT €9.75) and easyJet (PT £11.5) on Neutral and Air France-KLM (PT €4.6) on Sell. In the
airport space we remain positive on Aena (Buy, €135) and Flughafen Zurich (Buy, CHF 200), while we
think the outlook for Fraport (Sell, €45) in 2016 warrants more caution given the worsening volume
growth outlook.