JetBlue Downgraded At Credit Suisse, Firm Likes Southwest Better

• Shares of JetBlue Airways Corporation JBLU have appreciated 59.6 percent year-to-date, from a low of $14.36 on January 9
• Julie Yates of Credit Suisse has downgraded the rating on the company from Outperform to Neutral, while lowering the price target from $32 to $28.
• With the shares up almost 60 percent year-to-date, Yates expects investors to take profits and rotate to Southwest Airlines Co LUV, especially given the narrowing PRASM outperformance at JetBlue.

Analyst Julie Yates explained that Southwest Airlines’ Q4 core PRASM guidance “surprised to the upside,” while mentioning that Southwest Airlines appears to have “greater potential for unit revenue outperformance in 2016 as its network matures,” which should drive its share price.

The high expectations from JetBlue Airways was apparent in the “dramatic” reaction of its stock to the marginal PRASM mix for the quarter, along with the disappointing October guidance.

Yates believes that as “capacity growth accelerates to double digits in Q4 and Q1,” the company’s core PRASM outperformance versus the industry might slow, putting pressure on the shares.

According to the Credit Suisse report, “The incremental contribution from Fare Options is exceeding expectations, but we think that was priced into the stock and that investors were assuming JBLU could produce positive PRASM growth in Q4.”

However, this appears less likely following the October guidance. In addition, “Q1 has an exceedingly tough PRASM comp & even higher capacity growth than Q4,” the report stated.

The company indicated that it expected incremental operating income benefit in 2H2015 from Fare Options of at least $80 million. Yates cautioned, however, that there still were costs associated with the revenue, especially during the early phases of the program, when JetBlue Airways hired additional employees to help with implementation.