<p>Sharp reductions to estimates<br/>We make reductions to our FY09F EPS estimates of between approximately 20% and<br/>65%, as we switch our oil assumption from $90/bbl oil to $120/bbl. We forecast SAS<br/>and Air Berlin to lose money in FY08F. We downgrade easyJet and Ryanair from Buy<br/>to Hold, SAS from Hold to Sell. Despite this miserable outlook we see three ways to<br/>try to make money investing in airlines.<br/>Near term, good or bad, if it's got wings, short it<br/>As we go through the forthcoming results season, we think most airlines, Lufthansa<br/>apart, will have to downgrade guidance and consensus estimates will tumble, as a<br/>result of increased fuel costs. We think that estimates will be especially hard hit for<br/>those companies which lower their revenue outlook, whilst those companies which<br/>maintain their revenue outlook will not be believed. Therefore shorting the shares<br/>near term looks a simple near-term strategy, but one which would be costly should<br/>there be a collapse in the oil price.<br/>Get ready to be brave and buy what passes for quality in this sector<br/>We argue it is best to buy into the sector for long-term investing when things are at<br/>their grimmest. We are getting closer, but will not be at that point until the revenue<br/>outlook weakens. Ahead of that moment, we think investors would be well advised to<br/>start gritting their teeth preparing to buy into the financially strong companies with<br/>good strategic positions, which should be able to take advantage of other company's<br/>failures. In this group we would include easyJet, Ryanair, and the three European<br/>majors, British Airways, Air France and Lufthansa.<br/>Whilst waiting for a proper long term buy oppotrunity, play pairs<br/>We see good opportunities for investing in pairs in the sector, which should offer<br/>protection against oil price and overall market volatility. We would advise shorting,<br/>SAS against Finnair, airBerlin against easyJet and Ryanair, or being long Iberia<br/>against the Euro-majors. Long Air France and Lufthansa against British Airways is<br/>also a sensible position staying within the most liquid shares.<br/>Produced by: ABN AMRO<br/>Bank NV<br/>FTSE Eurotop 300 Index: 1313.20<br/>BBG E300 Transport: 944.41<br/>Sector performance<br/>(1M) (3M) (12M)<br/>Absolute 51.5 24.6 -183.4<br/>Absolute % 5.8 2.7 -16.3<br/>Rel market % -1.2 -1.3 0.6<br/>Source: Bloomberg<br/><a href="http://www.abnamroresearch.com">www.abnamroresearch.com</a><br/>Analysts<br/>Andrew Lobbenberg<br/>+44 20 7678 1488<br/><a href="mailto:andrew.lobbenberg@uk.abnamro.com">andrew.lobbenberg@uk.abnamro.com</a><br/>Christian Cowley<br/>+44 20 7678 1813<br/>Noirin Burke<br/>+44 20 7678 0366<br/>250 Bishopsgate, London, EC2M 4AA, United Kingdom<br/>Important disclosures can be found in the Disclosures Appendix.<br/>*Hoare Govett Ltd, a member of the ABN AMRO Group, is broker to this company</p><p>Contents<br/>A I R L I N E S 2 5 A P R I L 2 0 0 8 2<br/>I N D U S T R Y D Y N A M I C S<br/>Ugly times, but not yet ugly enough 3<br/>With oil at record levels we roughly halve estimates, though details vary across<br/>carriers. We do not model revenue crumbling, but this is a material risk. It could<br/>halve earnings again. Times are not yet ugly enough to Buy.<br/>How take make money in these ugly times 3<br/>Estimate downgrades 5<br/>Fuel 7<br/>Revenue at risk 10<br/>V A L U A T I O N C O M M E N T<br/>Target prices reduced, a lot 12<br/>Our three-stage DCF-based target prices almost all decline sharply, as a result of<br/>lower earnings forecasts. Valuation ratios are as volatile and unpredictable as the<br/>forecasts they are based on.<br/>Three-stage DCF-based target prices 12<br/>Risks to our target prices 12<br/>C O M P A N Y P R O F I L E S<br/>Air Berlin - Bad to worse 20<br/>Air France-KLM - Dodging the banana skins 22<br/>British Airways - Lunch London, tea Rome, bags in... 24<br/>Deutsche Lufthansa - Confident in the face of adversity 26<br/>easyJet - An opportunity for the future 28<br/>Finnair - The healthier airline of the North 30<br/>Iberia - Still our favourite 32<br/>Ryanair - If only planes ran on hot air 34<br/>SAS - This is not good 36</p><p>Contents<br/>A I R L I N E S 2 5 A P R I L 2 0 0 8 2<br/>I N D U S T R Y D Y N A M I C S<br/>Ugly times, but not yet ugly enough 3<br/>With oil at record levels we roughly halve estimates, though details vary across<br/>carriers. We do not model revenue crumbling, but this is a material risk. It could<br/>halve earnings again. Times are not yet ugly enough to Buy.<br/>How take make money in these ugly times 3<br/>Estimate downgrades 5<br/>Fuel 7<br/>Revenue at risk 10<br/>V A L U A T I O N C O M M E N T<br/>Target prices reduced, a lot 12<br/>Our three-stage DCF-based target prices almost all decline sharply, as a result of<br/>lower earnings forecasts. Valuation ratios are as volatile and unpredictable as the<br/>forecasts they are based on.<br/>Three-stage DCF-based target prices 12<br/>Risks to our target prices 12<br/>C O M P A N Y P R O F I L E S<br/>Air Berlin - Bad to worse 20<br/>Air France-KLM - Dodging the banana skins 22<br/>British Airways - Lunch London, tea Rome, bags in... 24<br/>Deutsche Lufthansa - Confident in the face of adversity 26<br/>easyJet - An opportunity for the future 28<br/>Finnair - The healthier airline of the North 30<br/>Iberia - Still our favourite 32<br/>Ryanair - If only planes ran on hot air 34<br/>SAS - This is not good 36</p><p></p><p> <br/></p><p></p>