Europe’s cheap airline stocks fail to get a peak season boost

The high season for summer travel has been abysmal for European airline shares so far. 

Air France-KLM and Norwegian Air Shuttle ASA both gave investors warnings this week about business conditions ahead that suggest the industry will continue to face tough times. Strikes, high costs and issues with aircraft deliveries have also plagued Europe’s carriers.

A UBS Group AG basket tracking the region’s airline stocks fell to the lowest since November this week and is down by about 13% since the start of the year, a bigger drop than the worst-performing sector in the benchmark Stoxx 600 index.

“European airlines have recently warned of lower fares or weaker-than-expected unit revenues as market capacity has continued to grow,” said Ruairi Cullinane, an analyst for RBC Capital Markets. 

Air France-KLM said on Monday that its French operations face lower revenue as travelers avoid Paris during the bustle of the Olympic Games. Then on Thursday, Norwegian Air Shuttle ASA cut its profit outlook for the full year, citing higher costs, lower demand and delays in aircraft deliveries. The stock plunged 16%, the biggest drop since 2021. 

To be sure, Stephen Furlong, an analyst at Davy, said airline stocks tend to fare better at the end of the year and the current run of weak performance isn’t unusual. 

“The most important quarter is to come,” he said, adding that he expects the shares to recover in the coming months. 

Plus, there’s some evidence that bargain hunters are emerging. The UBS basket of airline shares jumped 3.7% on Wednesday, helped by news that Deutsche Lufthansa AG’s €325 million ($350 million) investment in Italy’s ITA Airways won approval from the European Union.

Based on valuation, the six airlines in the UBS basket — Ryanair Holdings Plc, Lufthansa, EasyJet Plc, British Airways-parent IAG, Air France-KLM and Wizz Air Holdings Plc — might look tempting to investors. Their collective 12-month forward price-to-earnings ratio of 5.6 is much lower than the Stoxx 600’s valuation of more than 14.

All eyes are now on the major European carriers reporting earnings this month. Ryanair will be the first to release results for the first quarter on July 22, followed by EasyJet and Air France-KLM earnings the same week.

Ryanair Holdings Plc CEO Michael O’Leary has said price increases may moderate as memories of Covid lockdowns fade and travel demand normalizes. The post-pandemic recovery meant airlines were able to push through higher fares for almost two years as consumers engaged in “revenge” spending.

“We see the outlook for airlines more favorable than the market is pricing in,” said Cullinane at RBC.