- Macroeconomic indicators continue to benefit the sector, reinforcing our projection that global passenger traffic will hit 105-110%/115-120% of its 2019 level in 4Q24/4Q25
- Asia Pacific airlines to show the strongest earnings growth in 2024, with Chinese airlines leading the way
- European and US full-service carriers may see limited or slightly negative earnings growth, with US LCCs under pressure, while European LCCs should outperform
- Stock picks: US – Delta Airlines, Europe – Ryanair and IAG, Asia – Cathay Pacific and China Southern Airlines
Diverging earnings outlook across regions and business segments. While economic uncertainties persist, macroeconomic indicators largely favour the airline sector. We predict global passenger traffic to hit 105-110% of its 2019 level by 4Q24, with a gradual increase to 110-115% by 4Q25. Across the three major regions, we are most optimistic on Asia Pacific airlines, anticipating stronger earnings momentum driven by higher capacity growth and wider margins, with the Chinese airlines likely to see the strongest earnings upswing. Despite a stellar 2023 for US network carriers and European legacy airline groups, we expect modest to slightly negative earnings growth for both in 2024 due to insufficient capacity growth to offset lower unit revenue and persistent cost inflation. However, we expect European carriers to fare relatively better in 2024. 2023 was challenging for US low-cost carriers (LCCs), and we foresee limited improvement in 2024 due to above-trend capacity growth in the domestic market and a shift in traveller preference towards international travel. Conversely, we expect solid earnings growth for European LCCs, backed by stronger pricing power amid market share gains and constrained capacity growth.
Stock selection: we prefer European and Asian airlines and maintain a neutral stance on US airlines. We hold a more optimistic stance on the European and Asian airlines due to their more favourable risk-to-reward profiles. Valuations for US network carriers seem to align with their fundamentals, with Delta as our preferred play in the region. In Europe, Ryanair is our top choice in the region as we are more upbeat on its earnings trajectory. While the European legacy airline groups have traditionally traded at a discount to the US network carriers, the current gap is excessive, offering compelling entry points for the European airlines considering their slightly brighter earnings trajectories. While valuation multiples for Asian airlines appear high, they are commensurate with the region’s stronger earnings potential. We upgraded our recommendations on Air China and China Eastern Airlines to BUY as valuations have turned attractive following the steep correction in their share prices and still-promising earnings outlook. Our top picks in this region are Cathay Pacific and China Southern Airlines.