Who flies highest? Bernstein compares European airline performance

Bernstein analysts have introduced a new framework for assessing European airlines, arguing that traditional metrics like operating margin and ROIC are inadequate due to differing business models. They propose disaggregating ROIC into six components to better identify competitive advantages, noting that while Ryanair benefits from a lower asset load, IAG generates superior unit economics (EBIT/ASK), making direct operating margin comparisons misleading. As a result, Bernstein names IAG as its top sector pick, rating it Outperform with a £4.70 price target, citing its leverage to structural trends and high cash return potential.

Analysis

Bernstein analysts have introduced a new analytical framework for European airlines, contending that traditional metrics such as operating margin and Return on Invested Capital (ROIC) are inadequate for direct comparisons due to divergent business models. The analysis highlights that a higher operating margin does not necessarily equate to superior financial performance, citing a 2025 forecast where Ryanair's 16% margin surpasses IAG's 14%, yet IAG is expected to generate substantially higher unit economics (EBIT/ASK) of €1.3ct versus Ryanair's €0.8ct. Bernstein proposes disaggregating ROIC into six components to precisely identify an airline's competitive advantage. This approach reveals that Ryanair's strength lies in its low asset load and access to cheaper aircraft, whereas IAG's distinct advantage is its industry-leading unit economics. Based on this deeper financial assessment, Bernstein has designated IAG as its top sector pick with an 'Outperform' rating and a £4.70 price target, underscoring its leverage to structural trends and significant cash return potential, which is projected to exceed 50% of its market capitalization over the next five years.

Key Decisions for Investors

• Investors should consider IAG's favorable position, as its superior unit economics and a forecast for capital returns exceeding 50% of its market cap within five years underpin Bernstein's 'Outperform' rating.
• It is crucial to analyze airline investments beyond standard operating margins, as the fundamental profitability drivers for low-cost carriers like Ryanair differ significantly from network carriers like IAG, making direct comparisons misleading.
• For those considering a position in IAG, key performance indicators to monitor will be the execution of its substantial cash return program and the sustainability of its lead in unit economics (EBIT/ASK) against peers.