MS remains bullish on European airlines despite recent losses

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Morgan Stanley remains bullish about European airline performance despite recent losses stemming from the ash cloud disruption.

"While the cost impacts will certainly dent profitability for these carriers in the coming quarter, we remain optimistic on the sector," says Morgan Stanley research.

IATA estimates suggest the total cost to members of the week-long ash clouds disruption amounted to €1 billion ($1.32 billion), which Morgan Stanely estimates will be incurred by "70%-80" of its European airline coverage.

It notes the volume disruptions are "significant", but expects that volume trends can return to levels seen in late March-early April now that restrictions are lifted.

"When compared to other significant crises, the impact on demand and volumes was sustained for a period up to nine months (like September and SARS ), which we think is unlikely to recur."

Morgan Stanley believes many of the travellers who were impacted by the disruption will likely complete their journeys "either later this month or into May."

"Therefore, the estimates of lost revenues made by several sources last week could end up significantly exaggerated, in our view."

Also, Morgan Stanley notes traffic trends in the first weeks of April "remained robust", with volumes running up 3-4% on flat capacity growth.

"We expect that underlying demand trends were not materially affected by the disruptions last week and reversion to these growth trends can occur within the coming weeks."

Morgan Stanley also indicates "trends on key long haul markets" continue to improve, especially on the transatlantic as noted by recent US airline results.