Merrion Stockbrokers has recommended Aer Lingus as a "buy" and put a price target of €3.20 on the stock.
This would represent a healthy 32 per cent premium to its current share price level although it would still be 7 cents shy of Aer Lingus's all-time closing high in Dublin on March 23rd when it was still the subject of a takeover bid from Ryanair.
In a note to clients released on Wednesday, the broker said Aer Lingus has developed "an attractive strategic position" in the European airline industry.
It said the recent EU-US Open Skies deal brought a number of benefits for investors in Aer Lingus.
It increases the visibility of its long-haul growth prospects; potentially allows Aer Lingus to offer transatlantic services from any future bases it might establish outside Ireland; and makes it more attractive to other EU- based airlines seeking consolidation. It also enhances the value of its Heathrow slots, which Merrion says have a "notional" value of more than €300 million.
In relation to Heathrow, analysts John Mattimoe and Killian Jones noted that Aer Lingus has 23 summer pair slots (take off and landing rights) and 20 pairs in the winter.
With all EU- and US-based airlines allowed to go transatlantic from Heathrow, demand for slots will rise. Aer Lingus could also choose to open its own routes to the US from Heathrow.
On the flip side, Merrion said Open Skies will bring greater competition, particularly from US airlines flying directly into Dublin.
"However, in the shorter term, the lack of availability of long-haul aircraft for the next year or two will be a limiting influence [ on competition]."
Merrion, in line with other brokers, is forecasting an operating profit for 2007 of €87 million. It expects this to grow by 14 per cent to €99 million in 2008 and a further 10 per cent to €109 million in 2009.
It predicts Aer Lingus's capacity will grow by 14.6 per cent this year, by 15.1 per cent in 2008 and by 11.5 per cent in 2009. This would see passenger numbers rise from 19.7 million this year to 25.3 million in 2009.
Its load factor (the number of seats filled on each aircraft) is forecast to decline by one percentage point this year to 76.6 per cent and to remain "close" to that level over the next two years.
