Davy bullish over lowcost airlines

Davy Stockbrokers remains bullish on the European low-cost airline sector which it believes has huge scope for growth.

"European low-cost airlines' penetration rate is less than half of their US counterparts and the US sector is expected to double in size over the next 20 years," Davy said, adding rapid growth in Europe would be of most benefit to Ryanair and Easyjet.

In its first note on the low-cost British airline, it says that though cheap at current levels, easyJet has several issues to overcome including a declining yield environment, slot availability in continental Europe and its unhedged financial exposure.

Davy prefers Ryanair as the "pure play" in the low-cost sector as it has the lowest costs and highest margins.

However, ABN AMRO is less upbeat on the Irish airline, having downgraded its recommendation on the stock to reduce from hold last week. "Ryanair's extremely low airport, handling and marketing costs are not sustainable in the medium term, in our view," ABN said. It believes Ryanair will not be able to sustain its margins at current levels of around 30 per cent.