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Morgan Stanley says get on board airlines

Published: 05:46 03 Sep 2013 EDT

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Low cost airlines have taken a buffeting on concerns there is too much capacity this winter, but those worries are overdone, Morgan Stanley argues.

The heavyweight broker has done what it calls a “bottom up” examination of 32 countries that are part of the European short-haul network, and it reckons the fourth quarter of the current year will see seat capacity grow by just 0.5% year-on-year (y/y). That’s not too great a stretch from the current growth rate of 0.2%.

Morgan Stanley also notes that comparatives start to get tougher from March 2014, as prior bankruptcies a year earlier drop out of the cycle. That, the broker reckons, will put a natural brake on year-on-year growth rates.

“We see potential for further capacity shakeout following recent announcements such as AF’s [Air France’s] additional ~2,550 headcount reduction target and Air Berlin’s stated requirement for more turnaround measures. Such additional restructures have yet to be reflected in 2014 plans,” Morgan Stanley said.
According to the broker, airline scheduling will remain flexible up until the introduction of the winter schedule, which is at the last weekend in October. It sees neutral to downside risk from this point “because estimated future capacity is often used as a placeholder in the schedule and tends to be revised downward once the final capacity decision is taken”.

Having crunched the numbers, Morgan Stanley expects easyJet (LON:EZJ) and Ryanair (LON:RYA) to continue to benefit from the benign capacity environment.

“We forecast 3.2% total revenue per seat growth at EZJ in FY14 and 4.9% total revenue per passenger growth at RYA in FY14,” the broker said.

Shares of the airlines have taken a knock recently, ostensibly because of concerns over the price of oil, though Morgan Stanley believes the retreat was driven by a flight to safety rather than a response to oil prices, as equities grew volatile while the Syrian crisis brewed.

That share price weakness presents a buying opportunity, the US broker believes.

“We find that with largely unchanged earnings and pullback in prices potential upside at out top picks has widened to greater than 40%,” Morgan Stanley notes.

“On balance, we continue to find value in airlines and remain buyers of easyJet, Ryanair and IAG (LON:IAG) where we sustain Overweight positions,” the broker said.

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