International Consolidated Airlines Group (IAG) and Ryanair are the two best positioned European airlines to withstand the fallout from the Middle East conflict, according to Panmure Liberum, which warned that rationing of jet fuel is possible.
In a research note, the UK investment bank wrote that the two carriers are better insulated than their rivals against rising fuel prices and potent supply chain disruptions as they have high operating margins. It believes the current situation is a good buying opportunity for investors looking to invest in quality airlines.
Wizz Air fares less well in the bank’s assessment due to its high debts, very low profit margins and no unencumbered assets.
However, the recommendation to invest in quality airlines comes with caveats, namely that the Middle East crisis could deteriorate causing more disruption around the supply of jet fuel and trigger a recession in Europe.
The investment bank warns that a prolonged conflict could see jet fuel supplies being rationed potentially forcing airlines to reduce capacity. It said there are some stockpiles outside the Gulf countries and there is the possibility to source jet fuel from other regions, which would buffer airlines provided the war is short.
Various estimates suggest that before the war, Europe was sourcing 30-40% of its jet fuel from the Gulf. That fuel travels through the Strait of Hormuz, where Iran is blocking sea traffic to western countries.
Should airlines face shortages of jet fuel, the investment bank said they would prioritise their most profitable routes while potentially reducing flight frequencies - though this could be subject to government intervention.