BofA Asks: What Can Move Airline Stocks Higher?

In a report published Wednesday, BofA Merrill Lynch analyst Andrew G. Didora said that, while weak 2Q PRASM has resulted in lower forecasts for the airlines sector, there are two potential catalysts for the group.

Delta Air Lines, Inc. DAL reported its May PRASM at -5.5 percent, short of expectations and reduced its 2Q guidance to -4 percent to -5 percent from -2 percent to -4 percent. With this, Delta's outlook is now more in line with that announced by American Airlines Group Inc AAL and United Continental Holdings Inc UAL.

Both American Airlines and United Continental have projected 2Q PRASM at -4 percent to -6 percent. Delta cited lower-than-expected close-in domestic business yields as the primary reason for the PRASM miss. This coincides with weaker GDP growth, while capacity is nearing a peak in the US this year.

"While capacity creep has been driving volatility in the group of late and is one of the main reasons for our AAL downgrade this morning, the weaker economic climate begs the question on whether domestic capacity cuts are forthcoming," analyst Andrew G. Didora said, while adding that every carrier, with the exception of Southwest Airlines Co LUV has "either maintained or cut capacity in regions where economic activity was deemed to be weak or currency headwinds were rising."

In the report BofA Merrill Lynch noted two potential catalysts for the group:

1. "If our bookings data shows steady improvement, we believe the stocks would react positively. Thus far, net sales have not changed significantly over the past month but comps would ease considerably from here."
2. These companies have exhibited "capacity discipline of late and any positive capacity commentary between now and the 2Q calls would help change overall sentiment."

• Delta - Rated Buy, with price objective being reduced from $62 to $58. The EPS estimates for 2015 and 2016 have been reduced from $4.73 to $4.56 and from $5.92 to $5.89, respectively.
• American Airlines - Rated Neutral, with price objective at $50. The EPS estimates for 2015 and 2016 have been reduced from $10.04 to $9.73 and from $10.09 to $9.31, respectively.
• United Continental - Rated Neutral, with price objective at $75. The EPS estimates for 2015 and 2016 have been reduced from $11.58 to $11.51 and from $12.82 to $12.36, respectively.
• Southwest Airlines - Rated Buy, with price objective at $52. The EPS estimates for 2015 and 2016 have been reduced from $3.42 to $3.36 and from $3.68 to $3.67, respectively.