New Airliner Pair Trade: Stifel Upgrades Spirit, Downgrades Alaska Air

• The share price of Spirit Airlines Incorporated SAVE has appreciated 13.72 percent over the past month, while that of Alaska Air Group, Inc. ALK has appreciated 36.58 percent year to date.
• Stifel’s Joseph W. DeNardi has upgraded the rating on Spirit Airlines from Hold to Buy, with a price target of $60, while downgrading the rating on Alaska Air from Buy to Hold.
• DeNardi expects RASM trends to improve in 2016 and the competitive environment to stabilize for Spirit Airlines, while expecting more downside risk than upside potential for the estimates and sentiment on Alaska Air in 2016.

A “Self-Help” Story

Analyst Joseph DeNardi believes that “improving RASM trends, more favorable domestic capacity trends in 2H16, and more surgical low fare capacity deployment” from competitors would prove to be positive catalysts for Spirit Airlines during early-to-mid 2016.

Although competitive pressures are also stabilizing, with expectation of limited downside going forward, DeNardi expressed concern that “1Q sell-side RASM expectations are too aggressive as consensus seems to reflect an expectation of a sequential improvement in the y/y decline in RASM from 4Q to 1Q - an improvement we see as unlikely to materialize.”

According to the Stifel report, Spirit Airlines has “self-help” potential, mostly associated with the company’s ability to “defer aircraft/accelerate its share repurchase program, slow its ASM growth to more manageable/less disruptive levels, redeploy capacity into less competitive markets, and monetize untapped ancillary revenue opportunities.”

More Downside Than Upside

For Alaska Air, DeNardi explained that the company benefited during 2015 from moderating competitive capacity and better than expected PRASM performance. However, the company was expected to work through higher OA capacity and higher number of routes under development, which could affect the estimates and sentiment on the stock during early-to-mid 2016.

“While we view ALK as one of the first airline stocks to benefit from an eventual re-rating of industry multiples, we don't see this as a catalyst in the next 12 months nor as a reason to own the stock in the near-term,” DeNardi stated.

DeNardi also believes that the consensus expectations for 1Q16 could prove too optimistic, given the unit revenue pressures being faced across the industry in recent times.

“We note that Alaska has added 21 new routes in 2015 with 18 being added in 3Q and 4Q which suggests a higher percentage of ASM's under development through 2Q16,” the Stifel report said.

On the other hand, Alaska Air continues to be the best positioned in the industry to return cash to shareholders. The company has also indicated that it might use debt during 2016 to repurchase stock.

“In our opinion, while Alaska could see a greater degree of revenue pressure than expected in 1Q, its cash deployment program likely provides a floor to the stock,” DeNardi added.