Aer Lingus and Ryanair have been downgraded from ‘Buy’ to ‘Sell’ in a report from investment bank Goldman Sachs.
The report comes on a day when the price of crude oil hit a new record high of $139.89 a barrel in New York trade, surpassing the previous high of $139.12 dollars set on June 6th.
Goldman Sachs this morning cut its six month price target for Aer Lingus to €1.2 from €2.15 and significantly reduced its earnings estimates for the next three years.
It said Aer Lingus was exposed to three weak economies; Ireland the UK and the US and was also in the midst of aggressive growth adding an extra layer of capital expenditure.
The report also noted the airline's progress on cutting costs has "been slower than expected" and said its fuel hedging was below average for European airlines making Aer Lingus "very sensitive to changes in the oil price".
Among the risks facing the company are falling consumer demand, oil prices and Ryanair being allowed to bid for the airline.
Lingus shares closed up almost 4 per cent at €1.56.
Goldman Sachs has also cut its earnings targets for Ryanair noting that its customers are "more geared towards discretionary travel and price stimulation than most".
Noting that there is a time lag between a fall in consumer spending and travel the bank said Ryanair revenues were likely to remain strong over the summer before weakening in the autumn.
While noting that the airline seems relatively well positioned to survive the current difficulties facing the sector it notes that initiatives to cut costs such as grounding planes do not remove labour or capital costs.
For Ryanair to offset rising fuel costs – based on an average fuel cost of $120 a barrel – it would have to add €11 per ticket, a 25 per cent rise on the average ticket cost.
"Faced with a weakening UK consumer we believe Ryanair could struggle to push fares up by this order of magnitude . . " Ryanair shares ended almost 5 per cent lower at €3.09. In July last year the stock was trading at €5.82.
The Goldman Sachs said its analysts suggested a $200-a-barrel oil price was possible by the end of the year and that at this level all European airlines would be loss making.
Only those airlines with the strongest balance sheets and liquidity would survive with oil at those levels, the report said.