Air France-KLM Avoids Turbulence
Lionel Laurent, 10.01.07, 6:53 AM ET
It could be a very turbulent winter for airlines, especially if volatility in the financial markets and fluctuating oil prices continue to pose a risk. But Air France-KLM kept attracting investors on Monday after analysts cited it as a buying opportunity.
Goldman Sachs added the Franco-Dutch carrier to its "Conviction Buy" list, explaining that the stock had fallen 31% over the past two months despite the company's strong balance sheet.
"It stands out as consistently cheap versus its peer group," said analyst Hugo Scott-Gall, adding that Air France-KLM (nyse: AKH - news - people ) had underperformed Lufthansa (other-otc: DLAKF - news - people ) and British Airways (other-otc: BAIRY - news - people ) by 20%, since the start of August. He maintained his "Buy" valuation on the 7.3 billion euro ($10.4 billion) airline, and gave shares a target price of 30 euros ($42.70).
Shares in Air France-KLM rose 1.03 euros ($1.47), or 4.0%, to 26.80 euros ($38.15), in Monday afternoon trading in Paris. Lufthansa also gained 35 euro cents (50 cents), or 1.7%, to 20.52 euros ($29.21), in Frankfurt, while British Airways rose 7.75 pence (16 cents), or 2.0%, to 391 pence ($7.98), in London.
Scott-Gall sounded a more cautious note on the sector as a whole, based on the cyclical nature of air travel in tandem with the global economy. "We believe that the risk to revenue expectations is now downwards," he said. Though demand had been "sizzlingly strong" since 2003, the slowdown in the American economy and turbulent capital markets meant that sales were set to slow.
"Rarely, if ever, has premium travel grown while the U.S. economy has slowed or been in recession," said Scott-Gall.
The gathering storm clouds could also pose a problem for consolidation in the sector, which has seen ailing Italian carrier Alitalia (other-otc: ALAIF - news - people ), Spain's Iberia (other-otc: IBRLF - news - people ) and several smaller assets belonging to Scandinavian airline SAS (other-otc: SASDF - news - people ) all come up for sale. (See: "SAS Clips Its Wings") Although the sale process has been tame to say the least, with potential buyers including Air France-KLM and Lufthansa reluctant to pay a significant premium for new acquisitions, if the sector takes a hit from wider economic woes, then deal-making is even more likely to stall. |
