2023-05-08 07:45:27 ET
JPMorgan reshuffled ratings in the airline sector on Monday off the main contention that American Airlines ( NASDAQ: AAL ), Delta Airlines ( DAL ) and United Airlines ( UAL ) have wrestled the high ground from discounters.
Analyst Jamie Baker noted the revenue guides from the Big Three are significantly stronger and their margins are solidly higher. "Granted, lower costs help, but we believe it’s a fallacy that cost advantages somehow immunize low-fare airlines from aggressive competition, particularly given the advent of basic economy," he noted. In addition, the three remaining catalysts in the sector are seen as uniquely skewed against discounters with the business model requiring an abundance of capital, an abundance of aircraft, and an abundance of pilots.
The firm lowered its rating on Frontier Group ( ULCC ) to Neutral from Overweight due to the persistent headwinds seen for discounters. Southwest Airlines ( LUV ) was also dropped to Neutral from Overweight. While LUV possesses the industry’s deepest track record of profitability, the highest quality balance sheet, and a loyal customer base - recent operational hiccups are noted to have pressured share price and investors’ patience. In addition, more internationally exposed carriers are expected to outperform Southwest Airlines ( LUV ) in the near term.
The new outlook on airlines stocks from JPMorgan also included American Airlines ( AAL ) being upgraded to Overweight from Neutral. Baker and team said they breathed a bit more revenue life into the 2024 EPS estimate for American, which rises to $3.00 from $2.50. The crux of the upgrade is that revenue momentum and margin heft currently skew in favor of the Big Three and that balance sheet worries are not as strong as they once were.
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Airline stocks: American is upgraded at JPMorgan to bull rating while Southwest Airlines and Frontier are cut