| 10°C Dublin

Airline industry could take off quickly after crisis, says Davy

Close

Cancellations: Ryanair is among the carriers grounding flights in light of the coronavirus. Photo: Reuters

Cancellations: Ryanair is among the carriers grounding flights in light of the coronavirus. Photo: Reuters

REUTERS

Cancellations: Ryanair is among the carriers grounding flights in light of the coronavirus. Photo: Reuters

The airline industry "could be resuscitated as quickly as it collapses", with pent-up demand, a consolidated market, working capital inflows and very low fuel prices driving the recovery, according to Davy Stockbrokers.

But the International Air Transport Association (IATA) now reckons airlines will lose $250bn (€232bn) as a result of the Covid-19 pandemic and has urged governments to accelerate action to save carriers. The expected losses are twice as much as previously forecast by IATA.

While Davy has tipped Ryanair and Aer Lingus owner IAG as being the "most secure" in the current crisis, Citi reckons that Ryanair and Wizz are the only two carriers that do not require "imminent capital".

"We continue to believe that the European market will follow the US model of consolidation," said Davy analyst Stephen Furlong in a report from the stockbroker yesterday.

"The current crisis will hasten this," he added. "That is not to say that governments will not support airlines."

"However, the EU has to be careful that state aid does not lead to a distortion in market economics," said Mr Furlong in his report. "Our view is that, one way or another, weaker airlines will be smaller after this crisis."

He added that while airlines could bounce back post-crisis, there will be a logistical challenge in re-establishing hub flows and supply chains, while discounted fares will probably be necessary to boost travel demand.

"Longer term, we could see a smaller consolidated industry with GDP-like (rather than GDP-plus) demand growth, meaning less demand for aircraft and therefore putting those few airlines which are in the market for new deliveries in an even stronger position with the OEMs [original equipment manufacturers such as Boeing and Airbus]," he said.

Davy has now rated Ryanair and IAG shares as 'outperform' compared with a previous 'neutral' rating. IAG also owns British Airways, Iberia, Vueling and Level.

Ryanair has more than $4bn in cash to see it through the crisis, with CEO Michael O'Leary saying the carrier could survive 12 months without any revenue generation.

Citi has downgraded IAG to neutral from buy, and retained a buy rating on Ryanair shares.

"Ryanair and Wizz are the only two names in our coverage that our analysis suggests do not require imminent capital," said Citi in a note.

"At the other end of the spectrum, Lufthansa (despite its ambitious fixed cost reductions) and Air France-KLM may both require their market cap equivalents in the form of cash injections," it added.

"And, in the middle of the pack, IAG and EasyJet are by no means free of capital risk," its analysts noted.

IATA chief executive Alexandre de Juniac said that there is now virtually no passenger demand for airlines.

Airlines are fighting for survival in every corner of the world, he said: "For airlines, it's apocalypse now."

Indo Business