Investing.com -- European airline stocks moved lower Wednesday after Barclays (LON:BARC) downgraded ratings on major flag carriers, citing concerns that weakening North Atlantic demand could pressure profitability.
The bank downgraded Deutsche Lufthansa (ETR:LHAG) and International Airlines Group (LON:ICAG) (IAG) to Underweight from Overweight, joining Air France KLM SA (EPA:AIRF), which remains Underweight.
Lufthansa shares fell 1.8% and IAG lost 3.3% in European trading as of 09:58 GMT. Air France-KLM also slid 3.2%.
According to Barclays analysts, European carriers are heavily dependent on transatlantic profitability, estimating that "well over half of their EBIT derives from the North Atlantic."
While U.S. airlines have emphasized that recent revenue softness is limited to the domestic market, the analysts believe it is likely to spread to international routes.
“We also see macro threats to North Atlantic demand,” analysts led by Andrew Lobbenberg noted. “Comparison data from last year on the Atlantic was very strong and expectations for summer 2025 are very high.”
Despite strong advance bookings and high expectations for the summer season, Barclays lowered its unit revenue estimates for European flag carriers.
The report pointed to U.S. profit warnings from Delta Air Lines Inc (NYSE:DAL), American Airlines (NASDAQ:AAL), and United Airlines Holdings Inc (NASDAQ:UAL), suggesting that "the scale of downgrades in revenue guidance for 1Q, seen quite close to the end of the quarter, speaks of a marked rather than subtle change in trend."
Macroeconomic risks, including a potential slowdown in U.S. consumer and business confidence, are seen as additional threats to demand.
Barclays also highlighted risks from political tensions between the U.S. and Europe, which could impact outbound demand and premium leisure travel. "We think both the U.S. consumer and business confidence is vulnerable and we think the key issue is timing," the note stated.
The downgrades come alongside Barclays’ revised earnings estimates, with 2025 profit forecasts cut by 19% for IAG, 36% for Lufthansa, and 15% for Air France-KLM.
Price targets were also lowered significantly, with IAG cut to 250p from 420p, Lufthansa to €6.50 from €10.50, while Air France-KLM’s target remains unchanged at €7.
While the North Atlantic remains a structurally strong market, Barclays now expects European flag carrier earnings to weaken.
"We believe it is a good market, and we expect the major European and U.S. airlines will be profitable on the North Atlantic this year. But we now think they will be less profitable than we thought they would be two weeks ago," the analysts continued.
“We do expect demand to weaken on each side of the Atlantic and hence unit revenues to weaken."