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On Tuesday, Bernstein analysts provided a preview of the first quarter of 2025 for European airlines, with a focus on the performance and outlook of the industry. The quarter is traditionally not a strong earning period for European carriers, but it is a critical time for summer booking accumulations and demand shaping. Early indicators suggest robust Revenue per Available Seat Kilometer (RASK) on North Atlantic routes, with no immediate signs of demand pressure. According to InvestingPro data, Air France-KLM, with its $32.6 billion in revenue and market capitalization of $2.2 billion, stands as a prominent player in the passenger airlines industry. The company’s stock currently trades at an attractive P/E ratio of 7.81, suggesting potential value for investors looking at the sector.
Airlines like Ryanair, Wizz Air, Lufthansa, and Air France-KLM are expected to have an easier time compared to last year, with a drop in fuel prices likely benefiting them in the medium term, especially the ultra-low-cost carriers (ULCCs). International Airlines Group (LON:ICAG) (IAG) is anticipated to perform well in the first quarter due to strong transatlantic RASK, although the overall impact on earnings may be modest due to lower winter baselines.
Ticket prices have remained relatively stable, with low-cost carriers (LCCs) expected to maintain pricing levels year-over-year in the first quarter, despite a slight drag due to the Easter holiday. Long-haul yield trends appear most favorable for IAG, with Delta and United experiencing RASK increases of 8% and 5%, respectively. Lufthansa is also expected to see improving trends throughout the quarter.
In the event of an economic slowdown, the industry could face reduced yields, capacity, and margins, similar to past downturns. However, LCCs like Ryanair and Wizz Air have historically shown resilience in such conditions, often gaining market share as consumers seek cheaper travel options. These carriers are well-positioned to take advantage of any downtrading by passengers.
Air France-KLM’s focus for the quarter is cost management, as the company aims for a €2 billion EBIT improvement by 2028. The first quarter is expected to be the weakest, but management is optimistic about at least a €300 million increase in EBIT for 2025, despite challenges such as the impact of the Olympics and a cargo IT migration. The airline has the least exposure to the North Atlantic among the Big 3, which could be advantageous if demand declines significantly in that region. InvestingPro analysis reveals the company operates with a significant debt burden of $15.2 billion and a concerning current ratio of 0.65, highlighting the importance of its cost management initiatives. With 10+ additional ProTips available, subscribers can gain deeper insights into the company’s financial health and growth prospects.
Lufthansa is working on a turnaround, with 40% of its earnings coming from its maintenance business, providing some protection from demand fluctuations. The airline is focusing on operational stability, cost-effective platforms, fuel efficiencies, and Technik development as part of its transformation plan aiming for significant EBIT improvements by 2026 and 2028.
Ryanair, in particular, is highlighted as ready for any downturn, with fare increases in the third fiscal quarter and a capex holiday on the horizon. The airline is shielded from direct US market exposure and is likely to benefit from downtrading demand and lower fuel prices. Air France-KLM investors should note that the company’s next earnings report is scheduled for April 30, 2025. With a beta of 1.78 indicating higher volatility than the market, and trading near its 52-week low, InvestingPro analysis suggests the stock may be undervalued at current levels. Discover more valuable insights and Fair Value estimates with an InvestingPro subscription.
In other recent news, Air France-KLM reported a strong performance in the fourth quarter of 2024, with an operating profit of €1.6 billion, despite facing challenges such as a €160 million expense related to the Paris Olympics and operational issues at KLM. Redburn-Atlantic upgraded Air France-KLM’s stock rating from Neutral to Buy, raising the price target to EUR15.00, citing the airline’s transformation and improved financial prospects. Conversely, UBS downgraded the airline’s stock from Buy to Neutral, adjusting the price target to €11.45, due to challenges in ramping up capacity and controlling ex-fuel costs.
Additionally, Air France-KLM has proposed a €300 million acquisition for a 51% stake in Air Europa, including the assumption of Air Europa’s €475 million debt to the Spanish government. The airline is also considering the acquisition of TAP Portugal, contingent upon favorable conditions and timing, as stated by the CEO. The company is currently focused on continued recovery and examining strategic opportunities within the industry. The CEO also mentioned that discussions with the European Commission regarding potential mergers have not yet occurred. Meanwhile, costs at Schiphol are expected to be passed onto customers, according to the CEO.
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