Higher costs flagged by easyjet hit IAG shares

EasyJet PLC's warning of higher costs due to increased fuel prices and French air traffic control strikes, impacting its Q3 results and full-year profit outlook, caused its shares to fall 8% and pressured other airline stocks, including IAG, which dropped 2%. Analysts anticipate a mid-single-digit percentage reduction in easyJet's full-year consensus profit, despite strong performance from its holiday division. While Panmure Liberum cut profit forecasts by 7%, firms like UBS maintained 'buy' ratings, noting supportive underlying guidance for future quarters.

Analysis

A cost warning from easyJet PLC (LSE:EZJ) has introduced near-term headwinds for the European airline sector, causing a notable share price decline for both easyJet (initially down 8%) and peer International Consolidated Airlines Group SA (LSE:IAG), which fell 2%. The pressure stems from specific, quantified factors: a £10 million adverse impact from higher fuel costs and a £15 million impact from French air traffic control strikes. Analyst consensus for easyJet's full-year profit, previously circa £700 million, is now expected to fall by a mid-single-digit percentage, with Panmure Liberum enacting a 7% cut to its own forecast. This negative outlook on the core airline operation is partially mitigated by two key factors. First, the easyJet Holidays division is demonstrating significant strength, with profits described as "encouragingly" ahead of forecasts and viewed as a primary driver for improved medium-term Return on Capital Employed (ROCE). Second, despite the immediate challenges, underlying guidance for Q4 and Q1 2026 is considered "supportive" by analysts at UBS, who maintained their 'buy' rating, suggesting a divergence between short-term operational hurdles and the medium-term strategic outlook.

Key Decisions for Investors

• Investors should weigh the immediate pressure on easyJet's airline earnings from fuel and strike costs against the outperformance of its Holidays division and supportive forward guidance for Q4 and FY26.
• The contagion effect on IAG's shares highlights sector-wide vulnerability; therefore, re-evaluating exposure to European airlines based on their specific fuel hedging policies and sensitivity to labor disruptions is prudent.
• Consider the strategic value of diversified revenue streams within airlines, as the resilience of easyJet's Holidays unit is providing a crucial buffer against core operational volatility.
• Note that despite forecast cuts and target price reductions from analysts, the maintenance of 'buy' ratings from firms like UBS suggests the market reaction may present a value opportunity for investors with a longer-term horizon.