You'd be forgiven for thinking, with the war in the Middle East and its effect on fuel prices, that airline stocks would be a strong sell at the moment.
That's not the case, however, as RBC Capital Markets points out in a new research note it has sent to clients.
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ASX travel stocks likely to hold up
While there have been some fuel price impacts, the RBC analysts said solid demand underpinned the outlook for the next two quarters.
In the Australian market, RBC said Qantas Airways Ltd (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VGN) had "actively managed capacity and yields to counter elevated fuel costs'', and added that there was a constructive demand outlook.
Let's dive a bit deeper into what they are saying about each airline.
Qantas Airways
RBC has an outperform rating on Qantas shares, despite the ongoing volatility and uncertainty stemming from the Middle East conflict.
The broker added:
We believe QAN's near term earnings are now more defensible, given: (i) forward bookings now accommodate the fuel costs; (ii) fuel costs are more managed by the deep hedge program; and (iii) forward capacity is being managed to meet shifts in consumer demand. These conditions remain supported by Qantas' loyal customer base and what remains a systematically rational market environment.
RBC said they believed Qantas had the flexibility to further adjust its operations to manage its risk.
The broker has a $11.75 price target on Qantas shares compared to $10.68 currently.
Virgin Australia Holdings
RBC said Australia's number two carrier operates in a "highly rational" domestic market, indicating the two main carriers were unlikely to engage in an unsustainable price war.
The broker added:
At the upcoming result (28 August), we expect VGN to reiterate its focus on its discrete target markets and driving improved margins and returns through reduced operating costs. We forecast VGN's Transformation program to deliver 200-300 basis points of EBIT margin expansion and underpin FY25-28 EBIT CAGR +10%.
RBC said the cost-saving program had delivered $700 million in savings to date, with a further $400 million expected over the past financial year.
RBC has a price target of $3.50 on Virgin shares compared to $2.92 currently.
And finally, RBC looked at Auckland International Airport Ltd (ASX: AIA), which it has an underperform rating on.
The broker said the airport is one of the world's most strategic airport assets, but added:
AIA is facing an increasingly more uncertain near term outlook, with the flow on impacts of the current Middle East conflict likely to extend through FY27. AIA is ultimately underpinned by passenger movements, which we expect will be negatively influenced by airline decisions to raise pricing and reduce capacity to reinforce … margins and therefore returns.
The shares are dual-listed on the ASX and NZX.
RBC has a price target of NZ$8.25 on NZX-listed Auckland shares. Given that the stock is currently trading at NZ$8.95, this suggests downside from here.
