LONDON (ShareCast) - (Sharecast News) - Jefferies initiated coverage on a raft of European airline stocks on Wednesday as it argued that the market is overstating the risks.

It said the European airlines sector is pricing in 20-60% downgrades in 2026.

"The sector does face a challenging period as carbon headwinds enter the P&L and yield expansion is uncertain," Jefferies said.

"However, the market fails to recognise self-help measures and efficiency gains. Our flight plan favours exposure to new generation fleet delivery, non-flight revenue streams and turnaround opportunities."

It started coverage of BA and Iberia owner IAG and easyJet at 'buy' with price targets of 270p and 680p, respectively.

As far as IAG is concerned, Jefferies pointed to the re-rating and earnings opportunity.

"We see a resilient business as exposure to supply-constrained long-haul flights should support yields," it said.

"IAG has a small carbon headwind and benefits from its fleet upgrade plan (Airbus exposure), exposure to package holidays and a turnaround plan aimed to drive British Airways margins.

"The strong balance sheet gives optionality to continue to add brands and grow dividends."

On easyJet, it also pointed to a re-rating opportunity, saying the budget airline should benefit from its growing package holiday business, fleet renewal and self-help opportunities through optimising winter trading and ancillaries.

Ryanair and Lufthansa were both started at 'hold' with price targets of €17.10 and €6.40, respectively, while Wizz Air was started at 'underperform' with a 1,020p target price.

Jefferies said Ryanair's long term investment case is attractive, with its volume-led business model driving market share gains and cost leadership in the sector.

"This creates a highly cash generative business model, that on our cautious base case is capable of returning more than 10% of market cap to shareholders through buybacks over the next two years," it said.

"Questions around the medium term remain, however. The company should see a material cost headwind from carbon and only a small tailwind from new fleet over the next two years. With no defined cost programme, significant exposure to Boeing and a question mark around yield management capabilities, we stay on the sidelines."

As far as Lufthansa is concerned, Jefferies noted it has the oldest fleet in its coverage and the lowest margins.

"While fleet delivery should ultimately drive margin recovery, Lufthansa also has significant exposure to Boeing which could delay progress," it said.

"Question marks remain around the company's ability to negotiate better airport fees with Fraport and renegotiate labour contracts in the German business.

"We view plans to shift short-haul legacy-Lufthansa capacity to the new and more efficient AOC as a positive, but this comes with execution and market share risk."

Finally, Jefferies said it is more cautious than consensus on Wizz Air's yield and cost trajectory.

"On circa 20% ASK growth per year, we see risk that yields compress as the market absorbs additional supply," it said.

"Our FY27E EBITDA estimates are 9% below consensus, even on optimistic cost recovery assumptions."

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