(News Bulletin 247) – In a sector study, the British bank reiterates its confidence in European airlines despite warnings from their American counterparts and the rise in oil prices. She reaffirms that she “overweights” her advice on Air France-KLM.

The rise in oil prices is known to hurt airline stocks, for which fuel is one of the biggest (if not the biggest) expense items. The pan-European Stoxx Europe Total Market Airlines index has lost around 13% since its peak in mid-June, penalized by the increase in black gold prices.

However, in a sector note published on Tuesday, Barclays sent a message of confidence to European airlines.

Certainly, the British bank notes that several American companies have issued profit warnings, due to increases in labor and fuel costs as well as the weakness of their domestic revenues. But it puts into perspective the scope of these concerns for European companies.

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Fuel blankets

“When it comes to labor, US pilots want pay increases of around 40%, while European pilots are currently settling for increases in the range of 10% to 15%. We consider that the market for American pilots is more tense due to the 1500 flight hour rule (a rule which imposes a minimum of 1500 flight hours for a pilot to fly for an American company, Editor’s note) for newly pilot cadets qualified, which does not apply in Europe. We also believe that pilot salary increases in Europe should remain more limited than in the United States, given that pilots in Europe are already very well paid compared to the general population”, Barclays explains.

Regarding the weakness in revenues of American companies, the bank explains that this weakness is concentrated on the American market, a market which reopened much earlier than Europe, after the pandemic, and which is also suffering from increased competition. international flights.

Regarding fuel prices, the establishment emphasizes that European companies have coverages which represent between 60% and 80% of forecast fuel expenses for the fourth quarter as well as between 16% and 45% for the year. 2024, which protects them.

“We believe this gives them a significant advantage over their global competitors who do not hedge their fuel consumption. Normally, fuel hedging does not avoid the impact of the fuel hike, but it delays it. and mitigates the impact on airlines, giving them time to reduce capacity and therefore increase unit revenues,” Barclays explains.

Last point raised for the sector, the concerns of the GTF engines of the Pratt & Whitney group, which requires certain engines (delivered over the period 2015-2021) to carry out workshop visits and which therefore have repercussions on the aircraft fleet available. Barclays believes that this may constitute a problem for the Hungarian Wizz, but much less or in some cases not at all for the other companies. It considers that this technical error should result in a drop in total capacity (to simplify the number of flights put into service) of at least 2% on short-haul flights for the next 18 months. “This should be favorable to the sector as a whole, supporting unit revenues,” the bank concludes.

Air France-KLM had a great summer

Barclays thus reaffirms its confidence in the companies. Particularly on Air France-KLM. The bank adjusted its price target to 22 euros compared to 26 euros previously, remaining “overweight”, the equivalent of purchase. The bank’s target gives significant potential to the action of the Franco-Dutch transport group, of more than 80% based on the closing price on Monday evening.

“We believe that Air France-KLM performed very well during the summer of 2023, taking full advantage of the high-end leisure market with American tourists. We believe that KLM will have benefited from an operational improvement after the difficulties encountered in 2022. We estimate that Transavia will also contribute to significant profits in the third quarter of 2023, after its operational problems in the second quarter”, details Barclays.

The British bank also considers that Air France-KLM is in pole position to take over the Portuguese company TAP. The latter was nationalized by the Portuguese government in 2020 and its privatization should be launched next month, according to Reuters. “We believe that Air France-KLM should be well placed to be the partner of choice for the Portuguese government, given the good position of Air France-KLM’s network in Latin America,” Barclays explains, although the bank notes that the potential debt linked to this transaction raises eyebrows among investors.

Barclays also mentions certain risks. The French government is currently limiting the connections that Chinese companies can make to France, as explained The echoes, so as to protect Air France which cannot fly over Russian skies unlike Chinese groups. Barclays is concerned about this last point, noting that Chinese companies are starting to develop capacities in European hubs other than Roissy-Charles de Gaulle, namely Heathrow and Frankfurt, “thus risking compromising the role of Paris as a gateway entry of Chinese passengers into Europe.

The bank is also “overweight” on Lufthansa, Norwegian, Ryanair, easyJet and IAG, parent company of British Airways and Iberia. It is “underweight” on Wizz Air.