After the US and Israel airstrikes on Iran, European airline stocks plunged up to 9%

Investing.com - On Monday, European airline stocks plunged up to 9% after the U.S. and Israel conducted military operations against Iran, causing crude oil prices to surge over 7%.

As of 06:10 AM Eastern Time (11:10 GMT), the stocks of Jet2, Air France-KLM, Lufthansa Group, International Consolidated Airlines Group (ICAG), Wizz Air, Ryanair, and easyJet all declined between 2.3% and 9.2%.

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Citi Research reports that Wizz Air has the largest risk exposure among European airlines, mainly due to its high direct exposure to Israel and relatively low profit margins.

Citi states: “In a year when rapid capacity expansion is needed, its high direct exposure to Israel may require adjustments in aircraft deployment, and its relatively low profit margins make it more vulnerable to rising fuel prices.” The firm rates Wizz Air as “Sell/High Risk.”

In contrast, Ryanair is the least affected among the airlines covered by Citi, which rates the stock as a “Buy,” citing its large fuel hedging positions, high profit margins, and minimal exposure to the affected markets.

Saudi low-cost carrier Flynas is rated “Neutral” by Citi, as it also faces higher risks due to significant exposure in the Middle East and its early-stage fuel hedging plans.

Citi notes: “While the entire sector may perform weakly on Monday, if this becomes a prolonged conflict, these relative exposures reinforce our preference for Western markets and strong balance sheets.”

Beyond airlines, JPMorgan also highlighted broader ripple effects across the European aerospace and defense sector. In a March 1 research report, they predicted that European civil aerospace stocks would face near-term pressure, while European defense stocks might rise.

The bank considers BAE Systems the most likely to increase in value, with an overweight rating and a target price of 2,400 pence, compared to the February 27 closing price of 2,112 pence.

JPMorgan states: “We believe BAE Systems is the most likely stock to rise.”

JPMorgan analyst David Perry outlined two major pressures facing civil aerospace. The Middle East and air traffic passing through the region account for about 9% of global air traffic, which could weaken significantly during ongoing conflict.

Rising oil prices may also accelerate the retirement of older aircraft and engines. However, Perry notes that aircraft retirements have been low over the past seven years due to a shortage of new planes and a large number of GTF engines being grounded, which could ease this pressure.

Perry added that a strong dollar often results from high oil prices and geopolitical tensions, which could benefit MTU Aero Engines (which has fewer hedging transactions than peers) and Melrose (through foreign exchange translation).

In terms of defense, Perry pointed out increasing justification for boosting U.S. defense budgets. President Trump stated in January 2026 that he aims to increase the defense budget by 50% in the 2027 fiscal year. JPMorgan considers this figure a starting point for negotiations with Congress, with a 20-30% increase seen as more realistic.

BAE Systems derives about 44% of its sales from the U.S. defense market, the highest among European peers, followed by Renk at approximately 25%, Leonardo at about 23%, and QinetiQ at 18%.

JPMorgan also highlighted the need to replenish U.S. missile inventories. Media reports from June 2025 indicated that during 12 days of conflict that month, the U.S. used 15-25% of its entire THAAD intercept missile stockpile, roughly 100 to 150 missiles out of 650, to protect Israel from Iranian missile attacks.

BAE Systems supplies infrared seekers for the THAAD missile system, and JPM estimates each THAAD missile generates about $1 million in revenue for BAE.

JPMorgan notes that Iran retaliated over the weekend with missile and drone attacks against Gulf countries including the UAE, Bahrain, Kuwait, Qatar, Saudi Arabia, and Oman, and adds that these countries may now increase their defense spending on air defense systems.