Barclays upgrades four EU airlines, sees jet fuel falling as Iran war eases

Barclays projects kerosene at $950/MT in Q1 2026 and $1,000/MT in Q2, falling to $750/MT in Q3 and normalising to $700/MT thereafter. The bank upgraded IAG to overweight and raised Air France-KLM, Lufthansa and Finnair to equal weight, keeping IAG's target at £4.40 (stock £3.63, implying a 23% TSR) and lifting Lufthansa's target to €8 from €7.60. Barclays' scenarios show large downside in a bear case for FY2026 EBIT (Wizz Air -59%, Finnair -36%, Air France-KLM -19%, IAG -7%) and warns that the Gulf-carrier disruption windfall is already unwinding after Emirates restarted full operations on March 6.

Analysis

Winners will be carriers and business models that capture short-haul, point-to-point leisure demand and have low exposure to long-haul cargo rotations; their unit costs fall faster when jet fuel normalises and they avoid the capacity squeeze when Gulf widebodies re-enter. Second-order beneficiaries include airports and regional MROs that service narrowbodies — higher utilisation for LCC fleets lifts spare-parts and heavy-check scheduling revenues for 2-4 quarters.

The most important near-term risk is a binary geopolitics shock: a single material escalation (days-weeks) can re-inflate kerosene crack spreads and force last-minute capacity pulls, instantly flipping P&L for under-hedged LCCs. A more gradual catalyst chain (1-4 months) — Gulf carriers restoring freighters and long-haul lift, refinery yield adjustments as kerosene spreads compress, and consumer reallocation away from Gulf tourism — will erode the temporary windfalls to legacy/cargo-heavy operators.

Practical hedging and operational mechanics matter more than headlines. Airlines with fuel hedges locked at elevated levels will underperform the run-up when kerosene falls (they miss the upside), while carriers with large wet-leased or cargo fleets face outsized downside as global belly and freighter capacity normalises. Refiners will likely re-optimise yields toward middle distillates if crack volatility subsides, tightening merchant jet-fuel availability in transitional weeks and creating transient price dislocations.

Consensus is positioning for a smooth normalisation; that’s a binary underestimation. If Gulf carriers’ network restoration stalls because of crew rotations, regulatory recertifications or lack of cargo demand, the passenger upside for European carriers could persist longer than markets expect — a 3-6 month window where select LCCs collect outsized margins before broad-based recovery in long-haul supply.

Key Decisions for Investors

• Long RYAAY (Ryanair) 6–12 month directional: buy stock or a 9–12 month call spread (buy ATM, sell ATM+25%) sized to 1–2% portfolio. Rationale: asymmetric upside if kerosene normalises and Gulf long-haul demand reallocation persists; target 30–60% upside vs max loss = premium paid. Stop: -20% from entry or catalyst-failure after 90 days.
• Pair trade (defensive vs reopening risk) — Long RYAAY / Short IAG.L (IAG) for 3–6 months: overweight short-haul vs legacy long-haul to capture relative margin reversion as fuel costs fall. Position size: net 0.5–1% portfolio each leg; expected relative return 20–40% if kerosene drop and Gulf capacity returns.
• Refined-product spread trade (crack compression) — buy 3-month puts on ULSD/HO or sell ULSD futures vs Brent (short refined product, long crude) to express expectation of kerosene spread tightening. Triage sizing: 0.5% portfolio, skewed to protect against a geopolitics spike. Risk: sudden supply shock can produce sharp short-term losses; use options to cap downside.
• Event hedge: buy short-dated (30–90 day) OTM puts on broad airline ETF JETS or long-dated puts on select legacy carriers sized 0.5–1% to protect portfolio against a renewed air-campaign spike that would re-price ticketing and cargo revenues immediately.