These Analysts See Chilly Winter For Airline Stocks

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Buckingham Research analysts Daniel McKenzie and Scott Park reiterated their Buy rating on U.S. airline stocks after reviewing capacity trends to each major geographic entity.

According to Buckingham's report, airlines face two major headwinds this winter: an "excessive capacity backdrop" and the U.S. State Department's worldwide travel alert, which is worried about surging terrorist threats.

Despite the fact that airlines have cut 1.35 million seats from their first quarter (fiscal 2016) schedules, capacity will still rise 3.8 percent year-over-year, after adjusting for a leap year. Moreover, airliners "remain poised to report record profits in 2016 given the collapse in energy prices."

Tuesday's outlook for the first quarter compares to 4.1 percent growth in the fourth quarter of 2015, and at this point, "airlines are still sorting out the demand implications from a steady stream of negative news."

Related Link: 12 Ways To Invest In Airliners

While airlines have not done much in relation to capacity to Europe, domestic capacity has seen several large changes. For instance, American Airlines Group Inc AAL trimmed capacity at Dallas and transcon capacity tumbled further -- benefiting Virgin America Inc VA and JetBlue Airways Corporation JBLU.

Based on an early read of capacity trends to Europe and the Pacific for the second quarter of 2016, Buckingham analysts said "revenue pressure could persist into late spring though it's too early to draw conclusions; LATAM growth, on the other hand, eases materially."

"All in, industry capacity remains fairly elevated and the changes aren't enough to reverse pricing declines this winter," the analysts said. Current overcapacity is related to a one-time expansion by Southwest Airlines Co LUV at Love Field and¨a one-time re-seating initiative across the industry (each of the Big 4 are adding 6-12 seats to narrow-bodies) evidenced by industry departures that are flat YOY in 4Q15, they concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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Posted In: Analyst ColorLong IdeasReiterationAnalyst RatingsTrading IdeasBuckingham Research
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