The easing of US travel restrictions is breathing new life into European airline stocks.
IAG, which owns Aer Lingus, British Airways and Iberia, has been the star of the show in the last two weeks, soaring 21% after the White House said the US would open up to vaccinated foreigners and European countries relaxed coronavirus testing requirements for fully jabbed arrivals. Air France-KLM and Lufthansa have also rallied strongly, as has Ryanair.
However, investors are divided on whether the gains can last and the industry has been a laggard for a long time. European airlines remain about 25% below pre-pandemic levels, under-performing sectors such as industrials and retail, which are up as much as 30% from where they were back then. The catalyst of air-travel reopening could be just what they need for a more sustained revival, though the possibility of fresh restrictions is a constant risk.
Investors should look very seriously at so-called reopening sectors such as travel, said Alan Custis, head of UK equities at Lazard Asset Management. “The opportunities now, one would argue are much, much better, perversely, than they would have been probably if the pandemic hadn’t happened,” he said. That’s because excess capacity in aircraft, hotel rooms and restaurants has been eliminated, Mr Custis said. “There’s been a sea change.”
A similarly positive stance is held by Mamta Valechha, an analyst at Quilter Cheviot, which manages about £25bn. “We do continue to see value in the travel sector, particularly airlines which have been hit the hardest and are still way off their 2020 peaks,” Ms Valechha said.
Positive news is starting to gather pace. The relaxation of US rules led to a surge in bookings from Europe to the US. Air France-KLM reported a spike in Christmas bookings, while Lufthansa was upgraded at Goldman Sachs.
And while analysts have been slow to raise estimates for airlines, consensus is on an upward slope. Data compiled suggests the sector could be profitable again within about a year.