British Airways owner IAG lagged behind a London market rally on Tuesday. Worries about the outlook for premium traffic led RBS analysts to cut IAG from the broker’s “buy” list.

“We expect the weaker economic growth to flow through to lower business confidence,” RBS told clients.

“As first and business-class traffic dwindles, airlines will compete with gusto for those premium passengers that remain. This is likely to place further pressure on yield development.”

The airline industry’s “wafer thin” profit margins meant subtle changes in ticket pricing had a sharp impact on earnings, RBS said. Reducing 2012 yield growth by 2 percentage points led the broker to cut IAG’s expected earnings by 45 per cent to €445m. IAG shares closed down 1.1 per cent to 146½p.

Financial stocks led the wider market higher as the FTSE 100 bounced from two days of sharp declines. The index recovered a 1.2 per cent intraday fall to end higher by 0.9 per cent, or 44.63 points, to 5,174.25.

Royal Bank of Scotland rose 5.3 per cent to 21¾p, Barclays rose 4.7 per cent to 148¼p and Lloyds Banking Group was up 4.2 per cent to 31¾p.

The FTSE’s banking sub-index hit its lowest since April 2009 on Monday as Greek debt worries overshadowed a largely sanguine reception for the Independent Commission on Banking report.

Prudential took on 1.5 per cent to 576½p amid a revival of speculation that the insurer may be a target for a takeover or break-up.

Potential predators included AIA Group, the Hong Kong-listed insurer Prudential failed to acquire in 2010 with a $35.5bn bid.

Inmarsat rose a further 2 per cent to 486¼p on gossip of bid interest. Andrew Sukawaty, Inmarsat’s chief executive, was quoted as saying that the satellite network operator would be a “natural” target for private equity though there had been “no formal approach.”

Fresnillo was the weakest among the miners, with the Mexican silver group down 3 per cent at £19.30.

Citigroup downgraded Fresnillo to “sell”, arguing that recent outperformance made the stock look expensive against gold miners.

Cairn Energy fell 8.2 per cent to 287p after two wells at its Disko exploration prospect offshore Greenland disappointed.

The company said it had plugged and abandoned one well after it failed to find a reservoir or hydrocarbons, and that interim tests at a second had detected only minor hydrocarbon shows.

“It is unlikely that Cairn will prove the existence of a reservoir-quality rock in the Disko area,” said RBS. “This matters, as we believe it will be a crucial factor if Cairn wants to achieve good terms on any farm-out in 2012. In other words, we believe it’s looking increasingly likely that Cairn will have to fund a portion of any 2012 Greenland drilling campaign.”

Ashmore Group lost 3.7 per cent to 385p on profit taking after the FTSE 100-bound investment manager delivered in-line earnings. The minor disappointments, said analysts, were a fall in performance fees and no news on additional cash returns to shareholders.

Mitchells & Butlers gained 6.5 per cent to 251p after Joe Lewis said he was considering a 230p bid approach.

Deutsche Bank speculated that Mr Lewis might be angling for fellow shareholder Elpida, the investment vehicle of John Magnier and JP McManus, to make a higher offer.

National Express rose 4.4 per cent to 230¾p after bolstering its US school bus operations with the $200m proposed purchase of Petermann Partners.

Ahead of results on Thursday, Kesa Electricals rallied 3.9 per cent to 93¾p. Liberum Securities estimated that Kesa shares were discounting £500m, or more than 11 years, of losses or closure costs for its Comet business.

“We would not discount Kesa taking the nuclear option of putting Comet into administration at a later stage,” added the broker, which repeated a “buy” recommendation.

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