(News Bulletin 247) – The American bank went from “overweight” to “underweight” on the airline group, as well as on its rivals Lufthansa and IAG. The bank fears that capacity increases in the sector will result in a less favorable pricing environment.

The year 2023 was clearly a year of rebound for airlines, at least in terms of results. The third quarter accounts of Air France-KLM clearly illustrated this: the Franco-Dutch air transport group achieved a record operating profit, at 1.34 billion euros.

Which, in addition to the resumption of air traffic, underlines the transformation of the group led by general manager Ben Smith, elected manager of the year on Tuesday at the 2023 BFM Awards.

The fact remains that after this magnificent year 2023 for the sector, questions obviously arise for next year. Will air transport groups still benefit from such strong tailwinds?

JPMorgan came this Thursday, December 7 to lay a stone in the airlines’ garden. The American bank has downgraded several sector values ​​in Europe. The establishment fears that capacity increases, i.e. to simplify the number of flights and connections set up by carriers, will weigh on “yields”, i.e. the environment. tariff (and therefore prices).

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Long-haul under pressure

JPMorgan is also more concerned about long-haul flights, fearing an “oversupply” in this segment, while on the contrary short-medium haul flights should not experience significant capacity growth, due to capacity problems. Pratt & Whitney. Hundreds of planes equipped by the engine manufacturer, such as the Airbus A320 single-aisle aircraft, are in fact grounded due to a technical problem with the GTF engine. This obviously weighs on the supply of short-haul flights.

The bank thus prefers low-cost airlines to “legacy” companies, such as Air France-KLM, Lufthansa as well as IAG, the parent company of British Airways and Iberia.

“We are cautious on the sector through 2024, given the potential for large capacity increases that would meet weaker underlying passenger demand,” JPMorgan emphasizes. The bank fears that the weakening of domestic demand observed in the United States will be transmitted to Europe, even if capacities are less significant than in the United States in this segment (100% of the 2019 level, compared to around 120 % in the USA).

Towards a drop in profits for Air France-KLM?

Air France-KLM is not immune to JPMorgan’s pessimism. The American bank went from “overweight” to “underweight” on the stock, which amounts to lowering its advice from buy to sell, and its price target was slashed to 9.5 euros from 21.5 euros previously.

On the Paris Stock Exchange, Air France-KLM shares are coping poorly with the shock: the shares of the Franco-Dutch transport group lost 5.8% around 11 a.m., accusing the most pronounced decline in the SBF 120.

However, the bank judges that the group has spared no effort in recent years. “Air France-KLM is fundamentally a better company than before the pandemic, with the recovery in margins reflecting the restructuring carried out within the group. The balance sheet has also improved significantly and the company is expected to achieve a positive equity position of “by the end of the year,” JPMorgan explains.

But the American bank is observing signals which suggest that capacity increases are already potentially penalizing yields and the load factor of the group’s aircraft in the fourth quarter. As a result, “we are concerned that increasing capacity next year could lead to pressure on unit revenues and lower profits year-on-year,” she adds. The consensus of analysts compiled by Bloomberg expects an improvement in Air France-KLM’s operating profit in 2024, which seems difficult to achieve.

Note that Air France-KLM will hold a day dedicated to investors on December 14 (i.e. in a week) which will perhaps allow the group to allay the fears of the market and analysts.

Aside from Air France-KLM, JPMorgan also lowered its recommendation to “underweight” from “overweight” on Lufthansa, and to “underweight” from “neutral” on IAG. It remains “neutral” on EasJet and Wizz while its favorite stock in the sector remains Ryanair, the bank being attracted by its first-class margins and its cash flow. The Irish low-cost company has recorded a remarkable performance since the start of the year, with its share price jumping 50% in 2023.