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Airlines
How to survive, how to thrive
Trading is tough for network carriers, but we continue to see them as attractive
recovery investments. We see low-cost carriers as attractive momentum
investments. We upgrade Lufthansa from Hold to Buy, admiring its flexibility and
positioning for consolidation. We downgrade Air France from Buy to Hold.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
Air Berlin AB1.F Dec 2009 Buy €3.73 €4.75 & -0.06% n/a
Air France-KLM AIRF.PA Mar 2010 Hold& €10.90 €11.50 & -1.40 n/a
British Airways BAY.L Mar 2010 Buy £1.49 £2.25 -0.34 n/a
Deutsche Lufthansa LHAG.DE Dec 2009 Buy% €9.92 €12.00 % -0.14 n/a
easyJet* EZJ.L Sep 2009 Buy £3.02 £4.00 0.12 26.00
Finnair FIA1S.HE Dec 2009 Hold €4.61 €4.50 -0.45 n/a
Iberia IBLA.MC Dec 2009 Buy €1.59 €2.00 0.00 1,232
Ryanair RYA.I Mar 2010 Buy €3.77 €4.25 0.33 11.50
SAS SAS.ST Dec 2009 Sell SKr3.96 SKr3.50 -0.30 n/a
Source: Company data, ABN AMRO forecasts
We upgrade Lufthansa to Buy, downgrade Air France-KLM to Hold
In the present economic environment, network airlines are facing the twin objectives of
surviving the current crisis and positioning themselves to benefit from the recovery when it
comes. To straddle these two objectives, we think network carriers need flexibility and good
positioning in the unfolding consolidation of the industry. We see Lufthansa as particularly
well placed in these two aspects and we upgrade our rating to Buy. We downgrade Air
France-KLM from Buy to Hold after strong share price performance, noting particular
exposure to recent rises in oil prices.
Low cost carriers remain momentum plays; we prefer easyJet over Ryanair
We maintain Buy recommendations on both easyJet and Ryanair, but following the strong
share price climb by Ryanair our preferred investment is easyJet, which could benefit from
the prospect of cheaper oil and board concerns defusing.
Long term, short term and pairs
Our favoured long-term investments are British Airways, easyJet and Iberia. Our favoured
near-term investments are Iberia and easyJet. We would recommend pair trades of
Lufthansa against Air France, any other network carrier against SAS and easyJet against
Ryanair.
Contents
Network recovery plays, low cost momentum 2
We maintain our view that network airlines are attractive recovery investments and
that low cost carriers are attractive momentum investments. We upgrade Lufthansa
from Hold to Buy and downgrade Air France-KLM from Buy to Hold.
Unchanged view: network carriers are recovery plays 2
Unchanged view: low cost carriers are momentum plays 3
Changing our view: Lufthansa to Buy, Air France to Hold 3
Adjusting our view: now prefer easyJet to Ryanair 4
Our favourite long-term picks: BA, easyJet, Iberia 4
Near-term favourites: easyJet and Iberia 5
Pair trade ideas 5
How to survive, how to thrive 7
The March quarter was weak. We see the outlook for the year as weak for network
carriers, relatively benign for low cost carriers. As carriers manage through this
challenging time, we believe the key issues to consider are flexibility and positioning
for consolidation.
Flexibility and positioning for consolidation 7
The prospects for network carriers are tough 10
Lessons from the March 2009 quarter 17
Estimates head south, gearing north 25
Network carrier estimates are falling and gearing levels are rising. For easyJet and
Ryanair, the reverse is true. We would not be surprised to see network carriers
considering rights issues, once the revenue environment picks up.
Most recent estimate revisions 25
Estimate sensitivity to fuel and yield development 27
Balance sheet sensitivity 31
Base case balance sheet sensitivity 33
Upside case balance sheet sensitivity 34
Downside case balance sheet sensitivity 35
Valuation 36
Our target prices are defined using three stage DCFs, which are shown at the end
of this section.
Multiples 37
Asset-based valuation 39
DCFs 40
Company profiles 45
Air Berlin 45
Air France-KLM 52
British Airways 58
Deutsche Lufthansa 64
easyJet 71
Finnair 77
Iberia 82
Ryanair 88
SAS 94
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