Morgan Stanley initiates coverage on raft of airline stocks, highlights IAG as 'top pick'

(Sharecast News) - Morgan Stanley initiated coverage on a host of airline stocks on Wednesday, as it pointed to "short-haul pain" but "long-haul gain", with BA and Iberia owner IAG its "top pick". The bank started coverage of IAG at 'overweight', noting that it holds a dominant position at London Heathrow (LHR), controlling over half the slots and ensuring access to the world's largest premium and corporate travel hub.

"This advantage has supported resilient premium demand, helping offset softer US leisure travel trends," Morgan Stanley said.

It pointed out that IAG is set to expand its share in the profitable transatlantic market, with limited competition at LHR sustaining pricing power.

"Cost transformation efforts, new-generation aircraft like the A321XLR, and customer experience reinvestment are expected to further improve margins," it said.

The bank also said consensus expectations for FY25 EBIT appear conservative, with upside from stronger pricing, lower fuel costs, and better unit cost performance.

"Current estimates for fuel and CASK ex-fuel may prove cautious, with management's guidance suggesting more favourable outcomes, and MSe EBIT is 6% above Visible Alpha consensus for 3Q25 and FY25," it said.

"Beyond 2025, fleet renewal and digital initiatives should reduce costs and support strong margins and returns on capital. With robust cash generation, a solid balance sheet and enhanced shareholder returns, IAG shares are likely to rerate above historical averages, supporting an overweight rating."

The bank set a €5.5 price target on the stock.

Ryanair was also started at 'overweight, with a €30.7 price target.

"We expect Ryanair, Europe's largest low-cost carrier, to widen its unit cost advantage versus peers, allowing it to stimulate demand with lower fares while sustaining above-market growth," the bank said.

It also expects pricing to recover from last year's decline in FY26 considering demand trends and upbeat forward looking fares, with ancillary revenue growth at the high end of 1-2% YoY guidance.

"Overall, we see Ryanair's current share price as undervaluing its earnings growth, strong balance sheet with flexibility for buybacks or special dividends, and industry-leading returns, driving our overweight rating."

Morgan Stanley initiated coverage of Wizz Air at 'equalweight' with a 1,080p price target, citing limited near-term visibility.

"Near-term profitability is set to be pressured by Pratt & Whitney engine groundings, the exit from Abu Dhabi, and elevated D&A from a fully leased fleet," it said.

"As aircraft gradually return and deliveries are delayed, we expect the airline to gain from operating leverage and margin expansion in the medium term. However, near-term capacity growth continues to weigh on yields, while high D&A and financial costs risk pushing net income into negative territory in FY26, in our view."

Jet2 was started at 'equalweight' with a 1,420p price target as Morgan Stanley said near-term trends are weak due to intense competition on UK-EU routes, especially Spain, where overcapacity is pressuring yields despite modest package price increases and declining flight-only yields.

The bank started coverage of easyJet at 'underweight' with a 400p price target as it said near-term performance faces headwinds from competitive pressures and rising costs, with elevated winter ASK growth likely to pressure yields and profitability.

Lufthansa was started at 'underweight' with a €5.4 price target, while Air France KLM was started at 'equalweight' with an €11.3 PT.