Analysts reassess European airlines amid recession risks; AF-KLM downgraded

Investing.com -- European airline stocks have come under renewed pressure, with analysts warning that rising recession risks could further erode investor confidence in the sector.

Over the past month, the group has seen sharp losses of around 20% as concerns build around weakening demand, particularly on long-haul routes.

JPMorgan downgraded Air France KLM SA (EPA:AIRF) to Neutral, citing “financial gearing in an uncertain backdrop and no cash generation.”

The bank sees growing signs of softness in transatlantic demand, with lingering uncertainty about whether the slowdown will merely moderate elevated expectations or translate into outright pricing declines.

Meanwhile, short-haul travel remains resilient heading into the peak summer season.

Analysts at RBC Capital Markets echo the caution, noting that while fuel costs have dropped 15–16% in euros over the past ten days—providing a tailwind for the cost base—demand and unit revenue risks are rising.

“There is greater scope for fuel tailwinds to mitigate unit revenue risks in a Eurozone-crisis demand shock rather than a global financial-crisis-style demand shock,” the analysts wrote.

They see Ryanair's (LON:0RYA) high margins and net cash position as attractions in the current environment, while Deutsche Lufthansa AG (ETR:LHAG) is flagged for “above-average exposure to current risks, given above-average leverage, below-average margins and risks to travel demand between the USA and EU.”

While capacity growth is slowing, easing the supply-demand balance, the sector remains vulnerable to a larger shock.

RBC calculates that a 2% drop in unit revenue combined with a 10% decline in fuel prices would cut current-year EBIT by 8–16%. A steeper 6% revenue decline would lead to “substantial earnings downgrades,” especially for more leveraged names like Wizz Air (LON:WIZZ) and Lufthansa.

Analysts at both banks favor Ryanair and IAG (LON:ICAG) for their relative earnings strength. JPMorgan sees Ryanair as a “safe haven” in the group, while RBC pointed out that Ryanair’s EBIT is less sensitive to revenue shifts due to its intra-European focus and high margins.

For now, investor sentiment hinges on whether Europe is heading for a repeat of 2009 or a milder slowdown akin to 2012. Either way, the gap between winners and losers in the sector is set to widen.