Bernstein analysts have outlined a new framework to assess European airlines, arguing that traditional metrics such as operating margin or return on invested capital (ROIC) alone are inadequate.
“What is the best airline from a financial perspective? The answer is more complex than you think,” Bernstein wrote.
While many in the industry default to operating margin, analysts cautioned that “that is inadequate, as low-cost airlines will produce higher operating margins for the same unit economics.”
They pointed to Ryanair and IAG as examples. “In 2025, we expect Ryanair to produce a 16% operating margin vs IAG’s 14%, while unit economics (EBIT/ASK) are higher at IAG: €1.3ct vs Ryanair’s €0.8ct.”
Bernstein acknowledged its bias toward ROIC but noted limitations, particularly for asset-heavy businesses like airlines.
“ROIC is the best available single metric, but still problematic,” analysts said, since business models differ.
The firm said widebody aircraft are more expensive than narrowbodies, network carriers invest in lounges and other assets, and a focus on ROIC “may also create incentives to underinvest.”
Instead, Bernstein proposed disaggregating ROIC into six components, including EBIT/ASK, tax rate, distance flown, aircraft gauge, plane values, and other assets.
“Disaggregating ROIC into constituent parts reveals where an airline’s advantage lies,” the firm explained.
Ryanair is said to benefit from cheap planes and lower asset load, while “IAG generates the best unit economics… And on that factor, it isn’t even close.”
For investors, Bernstein concluded that “comparing the two on operating margin is misleading, given the difference in business model.”
Its top sector pick is IAG, rated Outperform with a £4.70 price target, citing leverage to structural trends and “high cash return potential (>50% of market cap back as cash in the next 5 years).”
