4 Critical Debates Airline Investors Are Having

In a new report, Credit Suisse analyst Julie Yates discusses four hot topics of debate among airline investors these days.

“Many seem to find the sector attractive at this valuation, particularly relative within Industrials, but are sitting on the sidelines for better macro data points or until there is evidence that an inflection in PRASM will actually materialize via Q2 guidance that shows Y/Y declines improving markedly from Q1,” she explains.

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Yates says recent talks with airline investors have centered on the following four topics:

1. It’s difficult for investors to be bullish on airlines when they are fearful that the U.S. may soon be entering a recession.

2. Valuations are exceptionally low for most airlines, but since airline multiples have a 90 percent correlation to crude oil prices since Q3 of 2014, low valuations may not be particularly meaningful.

3. Credit Suisse expects major airline buybacks in 2016 and predicts that United Continental Holdings Inc UAL and American Airlines Group Inc AAL will buy back up to 5.0 percent of their total market caps this year.

4. While airlines have said that they have seen no impact on business from the Zika virus, it’s still too early to tell how much of a toll the outbreak will ultimately take on the industry.

Credit Suisse’s top picks include Outperform-rated United, American, Delta Air Lines, Inc. DAL, and Southwest Airlines Co LUV.

Disclosure: the author holds no position in the stocks mentioned.