As an investor, it’s pretty easy to come up with an argument against owning airlines. When the economy is strong, they’re hampered by soaring fuel costs, which cut into their margins. And when the economy is weak, declining corporate travel sends airlines into bankruptcy protection with alarming regularity.
It comes as a surprise, then, to see a number of airline stocks surging by double-digits on Thursday. US Airways Group Inc. (LCC) rose 13.4 per cent, AMR Corp. (NASDAQ:AMR) rose 10.2 per cent, Delta Air Lines Inc. (NYSE:DAL) rose 10.8 per cent and UAL Corp. (UAUA) rose 18.5 per cent.
The reason for the jump appears to be related to an upgrade by Jamie Baker, an analyst at JPMorgan Chase & Co. According to Bloomberg News, the analyst argued that the cash levels at UAL, US Airways and AMR are adequate, reducing the risk of these airlines failing due to a liquidity crunch.
“Assuming stable demand and fuel, we now expect winter to pass with nary a bankruptcy in sight,” he said in his note.
Mr. Baker raised his recommendation on UAL to “overweight” from “underweight,” with a 12-month price target of $13 (U.S.). The shares traded on Thursday at $7.63. He also raised his recommendation on US Airways to “neutral” from “underweight.”
Clearly, investors are keen to follow the analyst’s shift, but should they be? It should be noted that Mr. Baker was remarkably bullish on UAL before pulling in his horns earlier this year. He had an “overweight” recommendation on the stock in mid-December, with a price target of $24. It then traded for nearly $10, but was on its way to a low of $3.07 in mid-July.
Canadian airline stocks were left out of Thursday’s rally. Air Canada (AIDIF.PK) fell 0.6 per cent and WestJet Airlines Ltd. (OTC:WJAVF) fell 4.6 per cent after it said it plans to raise up to $172.5-million in an equity offering.