JP Morgan Slashes Airline Targets, Notes 'Sanity Check Required'

In a report published Wednesday, JP Morgan analysts published a bearish report on the U.S. Airline industry, noting that "sentiment is materially worse than any point this decade."

According to the analysts, ASM (average seat miles) have been "creeping up" since 2012 while margins have also punched higher. However, 2015 and 2016 planned capacity of approximately 3.5 percent "looks similar" to 2014's 3 percent, but with domestic accelerating, international slowing, a downward revision bias has been established.

"Capacity forecasts actually haven't changed much since last autumn, yet investors seem to be reacting as if they've been radically increased," the analysts wrote. "Demand is uninspiring, but capacity hardly seems the reason to us."

The analysts continued that they are expecting capacity cuts as part of the second quarter earnings season and it will be helpful to tally unused gate capacity, count parked planes, and examine lessor pipelines in an attempt to quantity "how high" U.S. capacity might go in 2016.

Related Link: JP Morgan: 'Encouraged' By Southwest's Fare Hikes

Down 30 In 30?

The analysts noted a "golden oldie" trading rule known as "down 30 in 30" in which share corrections of at least 30 percent inside 30 trading days have been consistently followed by "significant rallies" with 70 percent of observations achieving at least a 50 percent potential return over six months.

The analysts suggested that this theory should not be expected to play out. Shares of American Airlines Group Inc AAL are "only" lower by 25 percent and later this week, the intra-30 day window moves so that the $34 range becomes the new "trigger."

"We doubt it will be triggered, but the same could be said around Ebola," the analysts concluded.

Price Target Changes

• Alaska Air Group, Inc. ALK's price target was lowered to $66 from $70.
• Delta Air Lines, Inc. DAL's price target was lowered to $63 from $72.
• JetBlue Airways Corporation JBLU's price target was lowered to $27 from $28.
• Southwest Airlines Co LUV's price target was lowered to $42.50 from $52.
• United Continental Holdings Inc UAL's price target was lowered to $78.50 from $89.
• American Airlines Group's price target was lowered to $72.50 from $84.50.