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Investing.com -- Barclays (LON:BARC) has upgraded Air France-KLM (EPA:AIRF), Lufthansa (ETR:LHAG) and International Airlines Group (VIE:ICAG) (IAG) to “equal weight” from “underweight,” citing better-than-expected second-quarter results and supportive macro factors including falling fuel prices and a weaker U.S. dollar.
In a note dated Monday, Barclays acknowledged that its earlier call on a sharp decline in North Atlantic revenues was overstated.
While demand in economy cabins has weakened, premium leisure travel remains strong.
Air France-KLM and Lufthansa reported unprecedented demand for first-class seats, with performance outpacing business and premium economy classes.
This segment, Barclays noted, has proven more resilient than expected, aided by financial market recovery.
Despite IAG’s North Atlantic unit revenue growth slowing from 13% in Q1 to 3% in Q2, the decline is milder than Barclays’ prior forecast.
The group now expects mid-single-digit unit revenue declines in the second half of 2025.
Other regional markets showed relative stability, with intra-Europe unit revenues holding steady, Asia and Africa slightly positive, and South Atlantic revenues particularly strong.
Barclays also highlighted macroeconomic tailwinds. Lower oil prices and a softer dollar are easing USD-linked costs, including fuel, which has sharply declined. This improves margin visibility despite expected pressure on unit revenues over the next three quarters.
AF-KLM’s upgrade is accompanied by a price target increase to €10.50 from €5.40. A one-point increase in FY25E passenger unit revenues resulted in a 29% boost to estimated EBIT. While Air France benefits from strong premium leisure demand and a favourable Olympic comparison base, KLM continues to face cost pressures from Schiphol charges and union negotiations. Transavia is also affected by geopolitical risks and will absorb costs as it integrates Air France’s La Navette operations.
IAG’s target was raised to £3.70 from £2.35, with a 3.5-point increase in FY25E passenger unit revenues driving a 25% uplift in EBIT forecasts.
While IAG is exposed to softening North Atlantic trends, its high margins and significant South Atlantic presence help offset this.
A €1 billion share buyback is set to conclude in November, with expectations of an additional program announcement.
Lufthansa’s price target increased to €7.20 from €5.20. A 2.1-point rise in FY25E unit revenues resulted in a 72% increase in EBIT projections.
The carrier’s cargo and MRO divisions are performing well, but mainline operations remain under pressure from cost inflation and weaker German demand.
Barclays remains skeptical of Lufthansa’s continued interest in airline acquisitions, particularly ITA and Air Europa.
All three stocks remain optically inexpensive, with FY25E P/E ratios at 4.3x (AF-KLM), 6.6x (IAG), and 8.4x (Lufthansa).
However, Barclays maintains a “neutral” industry view, pointing to persistent structural challenges, labour risks, and potential regulatory constraints ahead.