(Bloomberg) – The easing of travel restrictions in the US and UK is breathing new life into European airline stocks.

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British Airways owner IAG SA has been the star of the show for the past two weeks, climbing 21% after the White House said America will open up to foreigners who have been vaccinated and the UK has relaxed coronavirus testing requirements for fully bitten arrivals. Air France-KLM and Deutsche Lufthansa AG also grew strongly, as did low-cost airlines such as Ryanair Holdings Plc.

But investors are divided over the sustainability of the gains, and the industry has long lagged behind. European airlines remain around 25% below pre-pandemic levels, underperforming sectors like industry and retail, which are up 30% from where they were. era. The catalyst for reopening air travel could be just what it needs for a more sustained recovery, although the possibility of further restrictions is a constant risk.

Investors should take so-called reopening sectors such as travel “very seriously”, said Alan Custis, head of UK equities at Lazard Asset Management. “The opportunities now, they would say, are much, much better, perversely, than they probably would have been if the pandemic had not occurred.”

This is because excess capacity in airplanes, hotel rooms and restaurants has been eliminated, Custis said in an interview. “There has been a radical change. “

An equally positive stance is supported by Mamta Valechha, an analyst at Quilter Cheviot, which manages around 25 billion pounds ($ 34 billion). “We continue to see value in the travel industry, particularly the airlines that have been hit the hardest and are still far from their 2020 highs,” said Valechha.

The story continues

The positive news is starting to pick up. The relaxation of US rules has led to an increase in bookings from Europe to the United States. Air France-KLM reported an increase in Christmas bookings, while Lufthansa was upgraded to Goldman Sachs.

And while analysts have been slow to raise estimates for airlines, the consensus is on an upward slope. Data compiled by Bloomberg suggests the sector could return to profitability within a year or so.

Other sectors of the travel industry are also showing better signs. Tour operator TUI AG added 10% in three days after Britain said on September 17 it would reduce testing requirements and simplify its country risk ranking. Reservation software provider Amadeus IT Group SA, airport retailer WH Smith Plc and hotelier Accor SA are among a series of other stocks that have rebounded in recent times, although all remain well below the levels of ‘before the pandemic.

Still, investors may need to be patient. “Travel stocks are a story for the next year,” said Alasdair McKinnon, senior manager of Scottish Investment Trust Plc. “This year has already passed from a leisure travel perspective as the main holiday season has passed,” he said.

The shift to work from home, meanwhile, still has a ripple effect on travel revenue, according to Quilter Cheviot’s Valechha, who estimates that corporate passengers account for 30 to 60 percent of airline revenues. “There remains a lot of uncertainty as to when this will recover given the advancements in technology that allow doing business remotely,” she said.

Risk of resurgence

The resurgence of Covid-19 in major Asian destinations also poses a risk for some companies, like London-listed InterContinental Hotels Group Plc, according to Hannah Gooch-Peters, equity investment analyst at Sanlam UK, which manages around 4.9 billion pounds.

Sanlam owns travel stocks like IHG, but reduced its exposure in February. “The valuations of these companies don’t look that convincing,” Gooch-Peters said in an interview, “What we need is a more synchronized, global recovery for these stocks to see. really a big increase from here. “

For Gavin Launder, fund manager at Legal & General Investment Management, investors looking at airline stocks need to be confident that the next wave of reopening will not be followed by another setback.

“I think it’s very clear that people want to travel,” Launder said. “So it will be a good trade at some point, but we need the confidence that it will be little more than a false start.”

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