Bar set too high for European airline sector, says Credit Suisse

12th Oct 2012 12:39

Credit Suisse says that recent momentum in the equity markets has set the bar too high for members of the airline sector to avoid disappointing the market. Analysts at the Swiss bank expect European airlines Air France KLM, International Airlines Group (IAG), and Lufthansa to disappoint with their third quarter results. They believe that results will have to be very impressive in order to argue against profit-taking after the European airline sector significantly outperformed their respective benchmarks over the past month. Air France KLM is up 21% relative to the CAC40, Lufthansa up 7% versus the DAX, and IAG up 7% versus the FTSE. Meanwhile, the analysts acknowledge that prior performances were less impressive.Credit Suisse noted that fuel prices rose 6% to $1,100 per metric ton last week but maintained its pre-tax earnings estimates at €414m for Air France, €254m for IAG, and €246m for Lufthansa."In an uncertain revenue environment, we see scope for most short term disappointment at Lufthansa, then IAG, given expected year-on-year earnings declines. As jet fuel prices rise again, we highlight Lufthansa as most resilient and Air France - KLM as least but 2011-2012 earnings illustrate the stark need to cut costs: We think fuel pricing will prove a theme in the run up to 3Q in a questionable revenue environment," explained Credit Suisse.Credit Suisse pointed out that the European flag carriers have had seven quarters to adjust operations since jet fuel prices rose above $1,000 per metric ton in the first quarter of 2011. "As such, 3Q [third quarter] is likely to represent another illustration of the need to restructure cost bases to re-instate historical levels of return in a challenging demand environment."Credit Suisse has an 'underperform' rating on Air France-KLM with a price target of €3.55, an 'outperform' rating for Lufthansa with a price target of €11.50, and a 'neutral rating' for IAG with a price target of 140 pence.MG