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Lobbenberg suggests waiting for the grimmest point to buy into airlines

by Rachel Robson

With oil at record highs, premium traffic slowing and consumer confidence weakening, Andrew Lobbenberg at ABN Amro has downgraded both easyJet and Ryanair from buy to hold.

Lobbenberg believes that as we go through the forthcoming results season, most airlines will have to downgrade guidance and consensus estimates will tumble. ‘Estimates will be especially hard hit for those companies which lower their revenue outlook, while those companies which maintain their revenue outlook will not be believed,’ he says.

ABN Amro believes shorting the shares in the near term looks a ‘simple near-term strategy’ but one which would be costly ‘should there be a collapse in the oil price.’ The broker argues that it is best to buy into the sector for ‘long-term investing when things are at their grimmest’ but that point will not be reached until the revenue outlook weakens.

Lobbenberg has slashed easyJet’s target price from 670p to a mere 300p, ‘reflecting sharply reduced earnings forecasts’. Taking account of the $110 oil price, the broker has lowered its PBT forecast by 28% to £172 million for 2008 and by a whopping 51% to £141 million for 2009.

Ryanair’s target price has also been cut from €4.70 to just €2.80, again on the back of lower estimates. Lobbenberg reasons that Ryanair only has 10% of its Q3 2009 fuel needs hedged. ‘Given its famously lean non-fuel cost structure, we forecast fuel will comprise 45% of total costs in FY09, assuming $110/bbl,’ he says. EPS estimates have been reduced by 40% to €0.17 for 2009.