Oil has conditioned listed airlines in recent sessions because the rise in the price of crude oil has a direct impact on the costs of companies like IAG, Ryanair or Delta Air Lines. However, recent years have taught airline operators that they must protect themselves against the volatility of black gold., which experienced jumps of up to 5% in a single day this same week. To avoid paying too much or being a victim of geopolitics and supply disruptions, fuel coverage exceeds 70% in many cases of the total fuel an airline needs in a year. And it is a constant that repeats itself both in the low costlike Ryanair which competes on price, like IAG which focuses on a wider market segment and has a more diversified route network. The latter has, for its part, the best purchasing advice in the sector and a stock market potential of 25%.
The barrel Brenta benchmark in Europe recorded so far in October prices below 70 dollars but also above 81 dollars. This wide range is explained by the escalation of tensions in the Middle East with Iran’s entry into the conflict against Israel and by the Chinese fiscal stimulus plan proposed by the country’s authorities to consolidate its financial market. But in the absence of more details from China on its plans, crude oil prices are stabilizing at $77.8, reducing airline profit margins.
Although most companies pass on any increase in costs in the ticket price, the excellent insurance for airlines against fuel increases This is the early closure of part of your fuel needs for exercise. Of the nine listed European airlines, seven have increased their coverage for 2024 since the start of the second half.
With the latest available data, IAG has 76% of its needs assured in the third quarter of 2024 and 71% in the last quarter of the year (previously it was 64%). And it is already covered on average at 45% for next year. Lufthansa has more than 80% coverage of its needs, while Air France-KLM has protected 70% of its fuel this year against price fluctuations and 34% in 2025. Ryanair, which has a fiscal calendar that runs from March to March, has secured 75 % at a price of 80 dollars. per barrel.
This allows companies such as IAG, easyJet and Wizz Air to improve expected profits for this year compared to what the market expected at the start of 2024, according to FactSet, when a barrel Brent at an average price of $76.1 compared to the $80.8 now projected for the full year, according to Bloomberg. Concretely, the consensus of experts increases IAG’s operating profit by 13.2% in 2024 during these nine months. But not everyone gets cushion the impact of fuel prices at their expense. If Air France-KLM has not seen its expectations changed, Ryanair and Lufthansa are seeing a drop in their expected profit this year.
Improved efficiency and profitability
The cost per available seat kilometer flown (CASK) of European airlines represents 27% of the revenue per available seat kilometer flown (RASK). In fact, it would be traditional airlines that would close the year with the lowest operational costs associated with their profits per seat and per mile flown. In total, the ratio is more favorable than in 2022, where the high price of oil meant that for 100 euros of profit per seat and per kilometer, European airlines suffered an average cost of almost 35 euros. THE The forecasts collected by JP Morgan for 2025 count on a ratio of 25%at the same time as they remember that with a percentage lower than 25%, like those observed between 2015 and 2017, they brought with them the the best operating profit margins in the industry.
Faced with this panorama, IAG stands out with the best buying advice in the industryaccording to the market consensus collected by FactSet. Concretely, it surpasses Ryanair (the best rated to date by the experts), which has not happened since February 2021. The company which owns Iberia and British Airways will maintain a load factor higher than 85.5% in the years to come. Even if this occupancy rate is lower than what was expected at Air France or Ryanair (in the latter it will be close to 94% on average in 2024, according to analysis firms), the expected profitability at IAG will exceed all expectations. European airlines which do not focus their strategy solely on the low-cost segment.
IAG’s revenue per kilometer and per available seat will be close to 8.3 euros this year and 8.2 euros by 2024. For its part, the RASK projected for this year at Air France and Deutsche Lufthansa will respectively be 8.5 and 8.4 euros, while their fuel costs combined with their profits per seat and per kilometer would decline at a slower rate than the market consensus predicted for IAG.
At current prices, IAG has upside potential of over 25% up to three euros per share that experts set as a price target. Recently, Barclays revised its valuation to 2.9 pounds per share (3.46 euros at the exchange rate) considering a neutral scenario which would allow the Spanish-British company to get through the rest of 2024 better than the average of the European sector. “IAG has strong positions in the North and South Atlantic, where we expect to generate strong profitability following the summer peak,” said company analyst Andrew Lobbenberg. The expert places the price target at 3.75 pounds (4.5 euros per share) in the best scenario which implies an operating margin two points higher than 10.25% in the medium term projected by the investment bank. The consensus collected by FactSet considers that IAG’s operating profitability will exceed 11.6% this year and reach 12% in 2025.
However, it is not the one with the most potential among the European airlines with a purchasing council. At this stage is the low cost easyJet, with a lead of more than 30%according to FactSet, while the Irish low-cost airline has a potential of 22% up to its price target of 16.68 euros.
