Europe’s Airline Stocks Dive as Barclays Warns U.S. Carriers are Not Flying Solo

European airline stocks fell Wednesday as analysts at Barclays urged investors to pay attention to warnings from large U.S. carriers including American Airlines (AAL) United (UAL) and Delta (DAL), which over the last two days have slashed their first quarter revenue guidance on a softening demand picture. 

The three carriers, along with Southwest Airlines (LUV), which also lowered first quarter guidance yesterday, flagged weakness specifically in domestic demand.  But the investment bank believes this is likely to spread to international markets, ultimately impacting on European flag carriers International Consolidated Airlines Group (GB:IAG), Lufthansa (DLAKY), (DE:LHA) and Air-France KLM (AFLYY), (FR:AF). Shares in all three fell on Wednesday. 

Cutting both British Airways owner IAG and Germany’s Lufthansa to Underweight from Overweight, effectively a double downgrade from Buy to Sell, Barclays noted that these carriers are “highly reliant on North Atlantic profitability,” which they believe is threatened this year. The analysts left Franco-Dutch airline Air-France KLM at Underweight. 

U.S. Warnings Drove Rethink 

Barclays argues that the scale of U.S. carriers’ downgrades in revenue guidance for Q1, coming as they did so close to the end of the quarter, suggests “a marked rather than subtle change in trend.” 

AAL said it expects no growth in revenues in the first quarter, compared to previous guidance for growth of between 3% and 5%. DAL said revenue growth would not exceed 5% against a prior estimate of 6-8%. LUV slashed its forecast for Q1 growth to between 2% and 4% from a prior range of 5% to 7% increase. UAL also lowered guidance towards the lower end of its existing range. 

Assessing these forecast cuts, Barclays says it is “unlikely that the abruptly weaker domestic trading does not in time read across to international trading,” noting that U.S. consumer and business confidence is fragile. “Given intercontinental bookings have a longer lead time, it may take weeks or possibly months for the revenue softness to show on the Atlantic,” the analysts said.

Expectations May Need to Find Lower Cruising Altitude 

The three flag carriers are also running against sky-high expectations which creates downside risks in the event of a miss. The team at Barclays notes that against strong comparison data from last year and against high company and investor expectations for Atlantic unit revenues this year, they expect “downward momentum” in earnings, while recognizing in their note that “this call may be early.” 

The analysts also flagged “macro risks”, alluding to trade tensions which could impact on business and leisure travel. While they maintain major European and U.S. carriers will remain profitable in the North Atlantic this year, “we now think they will be less profitable than we thought they would be two weeks ago,” they wrote.

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