Morgan Stanley: Airlines — Gulf Carriers Return, Asia Yields Set to Fade
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Middle East conflict disrupted Gulf hub operations in 2Q26, sharply reducing the appeal of one-stop Europe–Asia itineraries via the Gulf and giving European network carriers a powerful pricing tailwind. Asia-Pacific yields surged year-over-year — up 13% at Lufthansa, 20% at Air France-KLM and an implied 18% at IAG — while soaring jet fuel reinforced industry-wide fare discipline. With Gulf carriers progressively restoring operations since March, regional capacity is already back near 2023 baseline levels, and the scarcity premium is fading. Air France-KLM management openly concedes the boost is temporary: July Asia yields have slowed from more than 20% in the second quarter to low-double-digit (DD%) growth. Morgan Stanley expects yields to normalize from 2Q26's exceptional highs, though fuel should keep pricing above mid-cycle levels near term, before new capacity and share recapture exert greater pressure. IAG is the top pick (Overweight), with Asia-Pacific just 5% of available seat kilometers offering strong downside protection; its valuation rests on blended 2027 EV/EBITDA of 3.9x and EV/EBIT of 6x. Lufthansa is rated Underweight — the largest risk, as it needs over 100% fuel recovery in 4Q26 to reach FY26 guidance — while Air France-KLM is Overweight (O) and cheapest versus its own history, at roughly 3x blended FY27 EBITDA and 7x EBIT. Ratings and price targets typically apply over 12–18 months.