Barclays Comments On Oil And Airlines, Offers 'Best Ideas'

Barclays made ratings changes to airlines Wednesday as analyst David E. Fintzen was “surprised just how limited the reaction has been in airline shares to lower oil.”

“We get that there is a healthy debate about how much lower fuel prices will stick, what the long-term ramifications are for capacity, and what investors should pay for "oil driven earnings".

“But for all that debate, it's very surprising to us that both [American Airlines Group Inc AAL] and [Delta Air Lines, Inc. DAL] are up just 10 percent each since June,” according to Fintzen.

“Fundamentally, the US airlines stand to see a ~$10bn+ decline in fuel costs in our 2015 outlook. We can debate how much will flow fully to earnings, but the potential remains substantial put against our $14.5bn pre-tax earnings estimate for 2014,” according to the analyst note.

Fintzen claimed that airlines “show 23 percent average upside potential on an aggressively conservative approach to modeling fuel benefits. Our upside case, which assumes fuel stays low through 2016 with much more limited revenue offset, shows ~65 percent upside to coverage.”

The firm’s “best ideas” were Spirit Airlines Incorporated SAVE, followed by American Airlines Group Inc AAL and United Continental Holdings Inc UAL which were upgraded to Overweight.

The firm downgraded Allegiant Travel Company ALGT to Underweight due to “better EPS growth stories elsewhere” in the firm’s coverage.

Delta Air Lines, Inc. DAL and Southwest Airlines Co LUV maintained Overweight ratings.

Shares of Spirit Airlines, American Airlines and United Continental were each up over 2 percent in the pre-market Wednesday.