A day after Cowen analysts downgraded several airline industry names, Morgan Stanley weighs in on the sector, maintaining its attractive view for 2017 as pricing is on a more stable path and P/Es remain low at ~12x.
Stanley thinks U.S. carriers are set to continue their supply discipline in 2017 even as the Trump administration potentially drives tax reform and consumer stimulus, while warning that airline stocks have surged in recent months and that margin compression has the potential to deliver a 350 basis point drop during the year.
The firm upgrades Southwest (NYSE:LUV) to Overweight on its "defensive qualities," revenue opportunity and fuel hedges, while downgrading United (NYSE:UAL) to Equal Weight on execution risks and a relatively rich valuation; yesterday, Cowen cut UAL while maintaining LUV at Outperform.
Cowen Research Helane Becker is out with commentary on the airline sector.
The closely-watched analyst lowers American Airlines Group (NASDAQ:AAL), Alaska Air Group (NYSE:ALK), JetBlue (NASDAQ:JBLU), Spirit Airlines (NASDAQ:SAVE) and United Continental (NYSE:UAL) to Market Perform from Outperform on concerns over margins. Delta Air Lines (NYSE:DAL) remains the favorite in the sector - while Southwest Airlines (NYSE:LUV), SkyWest (NASDAQ:SKYW) and Volaris (NYSE:VLRS) hold on to their Outperform ratings.
The U.S. airline sector as a whole is seen growing capacity in 2017 by 2.5% vs. +3.5% in 2016. Unit revenue growth of +0.7% is forecast vs. -4.6% last year. Jet fuel costs are predicted to increase 15% Y/Y.
SkyWest (NASDAQ:SKYW) announces a series of fleet transitions and contract updates aimed at reducing long-term fleet risk.
The company says its ExpressJet operation expects to transition to flying primarily dual-class aircraft in its CRJ operation by removing its CRJ200 aircraft from service over the next year.
SkyWest also announced that ExpressJet and American Airlines will place 12 dual-class CRJ700s into service under a multi-year term. The CRJ700s had been scheduled to be removed from service under a previously-disclosed early lease return arrangement.
Additionally, SkyWest and Bombardier entered into a termination agreement covering Bombardier's residual value guarantee agreements on 76 CRJ200 aircraft owned by SkyWest Airlines and ExpressJet. Bombardier agreed to pay SkyWest $90M by January in exchange for the release.
SkyWest estimates it will record a non-cash impairment charge in Q4 of $440M to $90M.