Battered European airline stocks celebrate easing of travel rules

London

THE easing of US and UK travel restrictions is breathing new life into European airline stocks.

British Airways owner IAG has been the star of the show in the last two weeks, soaring 21 per cent after the White House said America would open up to vaccinated foreigners and the UK relaxed coronavirus testing requirements for fully jabbed arrivals. Air France-KLM and Deutsche Lufthansa have also rallied strongly, as have budget carriers such as Ryanair Holdings.

But 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 per cent below pre-pandemic levels, underperforming sectors like industrials and retail, which are up as much as 30 per cent 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 like 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."

That's because excess capacity in aircraft, hotel rooms and restaurants has been eliminated, Mr Custis said in an interview. "There's been a sea change."

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

A similarly positive stance is held by Mamta Valechha, an analyst at Quilter Cheviot, which manages about £25 billion (S$46 billion). "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 by Bloomberg suggests that the sector could be profitable again within about a year.

Other areas of the travel industry are also showing better signs. Tour operator TUI added 10 per cent in three days after Britain said on Sept 17 that it would scale back testing requirements and simplify its country risk rankings. Booking software provider Amadeus IT Group, airport retailer WH Smith and hotelier Accor are among a raft of other stocks that have rebounded of late, although all remain well below pre-pandemic levels.

Still, investors may need to be patient. "Travel stocks are a next year story," said Alasdair McKinnon, lead manager of Scottish Investment Trust. "This year has already gone from a leisure travel perspective as the main holiday season has passed," he said.

The shift towards working from home, meanwhile, is still having a knock-on effect for travel earnings, according to Quilter Cheviot's Ms Valechha, who estimates that corporate passengers make up 30 per cent to 60 per cent of airline revenue. "There remains much uncertainty when this will recover given the advancements in technology to do business remotely," she said.

Covid-19's resurgence in key Asian destinations also poses a risk for some firms, such as London-listed InterContinental Hotels Group, according to Hannah Gooch-Peters, an equity investment analyst at Sanlam UK, which manages about £4.9 billion.

Sanlam holds travel stocks like IHG, but reduced its exposure in February. "The valuations of these companies are not looking that compelling," Ms Gooch-Peters said in an interview: "What we need is a more synchronised recovery, globally, for these stocks to really see a big increase from here."

For Gavin Launder, a fund manager at Legal & General Investment Management, investors looking at airline stocks need to be able to trust that the next reopening wave won't be followed by another setback.

"I think it's very clear that people want to travel," Mr Launder said. "So that will be a good trade at some point, but we need that confidence that it's going to be a bit more than a false start." BLOOMBERG