While “summer is at risk” for the airline and travel companies, brokers and investment banks have rushed to support what they see as the best positioned stocks in the sector.
The City of London number crunchers were reacting to expectations that the government will announce mandatory hotel quarantine for some travellers on Wednesday, a day after Rolls-Royce warned that the new strains of coronavirus were likely to hit its airline revenues this year
While the accelerating deployment of vaccines means an end to the COVID-19 pandemic is potentially within sight, broker Liberum sees “a material and growing risk that restrictions on international travel remain onerous for longer than we had previously anticipated”.
READ: Rolls-Royce blames new Covid strains on worsening outlook for 2021
“We now see a chance that significant restrictions remain in place and impact at least part of the peak summer season, jeopardising plans to begin rebuilding air travel demand and balance sheets.”
Over at Peel Hunt analysts said following the latest lockdown in the UK, travel restrictions have been tightened in other countries “and, if anything, they are becoming more severe”.
The broker sees a particular affect on business travellers and for International Consolidated Airlines Group PLC (LON:IAG).
“The longer these restrictions remain in place, the more established the shift away from business travel and towards video calling becomes, and also the higher the group’s cash burn despite its cost restructuring and leading market positions,” the Peel Hunt analysts said.
Global airlines face an uncertain recovery, agreed Berenberg, as lockdowns and border restrictions are overwhelming the COVID-19 vaccination rollout enthusiasm.
“Airlines have struggled with false dawns, with a hoped-for booking surge the latest disappointment, particularly in Europe,” analysts at the German bank said.
Depressed levels of cash bookings are delaying the airlines’ ability to return to cash flow breakeven, and with more equity dilution, “valuations appear elevated as many investors have also positioned for eventual travel resurgence”, they added.
But Berenberg said it is sticking with its ‘buy’-rated airlines that it sees as having “opportunities to take industry profit share and return towards pre-pandemic margins most quickly”: IAG, Wizz Air Holdings PLC (LON:WIZZ) and Southwest Airlines Co (NYSE:LUV).
Berenberg upped its target prices across the sector, lifting IAG to 190p from 180p and for Wizz to 4,800p to 4,200p; and also upped easyJet PLC (LON:EZJ) to 850p from 820p and Ryanair Holdings PLC (LON:RYA) to EUR15 from EUR12 and remained at ‘hold’ on both pan-European budget airlines.
Liberum, on the other hand, cut its targets for easyJet and Ryanair to 1,000p from 1,200p and to EUR15 from EUR17 respectively, while upping its target for IAG to 150p from 100p.
Peel Hunt downgraded its forecasts on IAG but raised their target price to 145p from 100p.
This will clearly impact the ability of passengers to fly and means that we push recovery in our forecasts back by three months to 2Q FY21E. We downgrade forecasts and reiterate our Hold recommendation but raise our TP to 145p.
Rolling back the forecasts
A day earlier, Rolls-Royce Holdings PLC (LON:RR.) had warned that because of the new Covid variants it was expecting lower revenues from its airline customers in 2021.
Reacting to this, JPMorgan, Credit Suisse and Goldman Sachs all cut their targets, to 45p from 50p, to 53p from 59p, and to 107p from 122p.
JPMorgan expects a recovery of the travel sector to follow a four-phase journey: flight search; flight booking; hotel search; and hotel booking.
“We currently stand in Phase 2, we believe, awaiting Phase 3, with the recent surge observed in flight bookings not yet reflected in hotel search/booking.”