IAG and Ryanair tipped as best airlines to ride economic turbulence

Airline stocks have tanked in the past month due to rising recession risks linked to US tariffs, and JPMorgan warned that the market’s pricing may not be cautious enough.

The US investment bank said that given the risks, it prefers short-haul over long-haul, and prefer “quality” free cash flow-generating companies, such as Ryanair Holdings PLC (LSE:RYA) and British Airways owner International Consolidated Airlines Group SA (LSE:IAG).
Air France-KLM was downgraded to ‘neutral’, meanwhile, with the bank citing high financial gearing and a lack of cash generation, while Lufthansa was rated ‘underweight’, due to cost pressures and exposure to the transatlantic market.

JPMorgan said rising recession risks were weighing on sentiment across the sector, with airline stocks in Europe declining around 20% in the last month.

The bank expects transatlantic demand to soften and highlighted that a deep downturn could push AF-KLM and Wizz Air Holdings PLC (AIM:WIZZ) into losses.

Looking back to the global financial crisis (GFC), premium airlines underperformed economy, and the network carriers (IAG, AF-KLM, Lufthasa) saw outsized impacts versus the budget airlines, and across the sector, peak-to-trough underlying profit (EBIT) declines were 70-80%, with others pushed into losses.

“In our view the sector is not currently pricing in a GFC style scenario, which would lead to considerably more share price downside if it were to materialise.”

Ryanair was rated ‘overweight’, with the bank describing it as a relative “safe haven” business model.

IAG was also an ‘overweight’ with its share price target recently upped by JPM to 600p.