Why Morgan Stanley Doesn't Like Hawaiian, Southwest Or Virgin America

In a report published Tuesday, Morgan Stanley analyst Rajeev Lalwani initiated coverage on several Airlines, referring to “structural positives, impressive ~10% FCF yields, double-digit EPS growth.” The analyst, however, did not favor three low-cost/leisure carriers.

• Virgin America Inc VA – Initiated with Underweight and a price target of $30.

Analyst Rajeev Lalwani believes that Virgin America’s unit revenues could come under pressure due to the company’s desire to grow and its exposure to highly competitive markets. Although the company has historically performed better than peers in its markets, this trend “has the potential to reverse,” Lalwani said.

“In addition, the uncertain outlook is exacerbated by VA's relatively low margins versus peers and the overhang created by the significant private ownership in the company as there are indications of at least a partial wind down,” the Morgan Stanley report added.

• Hawaiian Holdings, Inc. HA – Initiated with Underweight and a price target of $25.

Hawaiian Holdings enjoys a “near-monopoly” on inter-island travel. However, analyst Rajeev Lalwani enumerates the reasons for the rating as: “benefits of a maturing international network,” the threat of “competitive capacity on mainland flying,” risks related to the company’s expansion into Asia, currency volatility and lower fuel surcharges.

• Southwest Airlines Co LUV – Initiated with Underweight and a price target of $37.

In the report Morgan Stanley noted, “Southwest is a high quality airline with its investment grade balance sheet, a history of low cost and high growth, and a shareholder friendly approach. That being said, years of success as a growth play and its resulting size may make it tough to stand out versus legacy peers going forward.”

Lalwani expects Southwest’s capacity growth to decelerate, fuel and labor costs to rise and earnings to remain “relatively flat.” These expectations, along with the company trading at a “meaningful premium” versus legacy carriers, make Southwest less preferable than other airlines “where price upside is more substantial.”