Barclays downgrades European airlines

(Sharecast News) - Barclays has downgraded Europe's flag carriers, including the owner of British Airways, on the back of potential weakness in the US market. In a note on European airlines published on Wednesday, the bank cut its rating on British Airways-owner International Airlines Group and Lufthansa to 'underweight' from 'overweight', and reiterated its 'underweight' rating on Air France-KLM.

Barclays said it was a "simple macro call".

It continued: "European flag carriers are highly reliant on North Atlantic profitability. While they do not disclose regional profitability we estimate that well over half of their EBIT derives from the North Atlantic.

"We think that the revenue weakness flagged by the US full-service airlines in profit warnings may spread from the domestic market to the international markets. We also see macro threats to North Atlantic demand."

A number of US airlines cut their estimates this week, including Delta Air Lines and American Airlines, on the back of mounting economic uncertainty.

Barclays argued that the North Atlantic remained a "good market" and said the major European and US airlines would likely continue to make profits from it this year.

But it continued: "We now think they will be less profitable than we thought they would be two weeks ago. We do expect demand to weaken on each side of the Atlantic and hence unit revenues to weaken.

"Against strong comparison data from last year, and against high company and investor expectations for Atlantic unit revenues this year, we foresee downward momentum to European flag carrier earnings.

"We recognise this call may be early. We hear only confidence about the Atlantic from the airlines to date.

"However, we still think a weakening trading environment on the North Atlantic will likely soon emerge."