Limited Fundamental News Supporting European Union Airline Price Increases; EasyJet Remains Top Pick

Globally, airlines enjoyed a strong run in recent share price performance, with the average price appreciation of the six European airlines in our coverage of 17% over the past month. Aside from Ryanair and Wizz Air, which are trading above precoronavirus levels, the balance of our coverage remains below precrisis levels as the pandemic continues to challenge industry balance sheets and cash flows amid a prolonged recovery due to persistent travel restrictions. Besides, increased talk by governments of vaccine passports, which could pave the way for reopening travel, we find little fundamental news that has changed the sector’s prospects, and believe most of the price increases may be attributed to a rotation of capital into unloved sectors from high-flying tech names, which have seen a retreat from recent highs. EasyJet (fair value estimate: GBX 1,090) continues to offer the best risk-adjusted upside in the sector, while low-cost peers Ryanair (FVE: EUR 14.50) and Wizz Air (FVE: GBX 5,000) are trading above our fair value estimates. The legacy carriers, Air France-KLM, Deutsche Lufthansa and International Airlines Group, are trading well below our fair value estimates but come with very high to extreme uncertainty as they face a high probability of capital restructuring, which could hit equity values.