Is It Time To Lower Expectations For Airlines?

In a report published Wednesday, Deutsche Bank analyst Michael Linenberg downgraded shares of American Airlines Group (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL) and United Continental Holdings Inc (NYSE: UAL) given the view that international sales will be a source of earnings disappointment for the next few quarters.According to Linenberg, the strong U.S. dollar, greater-than-expected capacity increases by non-U.S. airlines and decelerating global GDP growth will add further pressure to his international PRASM (Passenger Revenue per Available Seat Mile) forecast for 2015. However, Linenberg argued that the three airlines could be quick to utilize their "sizable" share repurchase authorization in response to any weakness in their stock, implying shares will be range-bound in the near-term."We note that our rating changes reflect our near-term (12 month) view," Linenberg wrote. "However we continue to believe that the long-term (>12 months) investment thesis is still intact i.e. the US airline industry has become an investable sector with significant free cash flow and run by management who are pro shareholder."The analyst recommended owning domestic airliners that generate the majority of their sales in the U.S. with Southwest Airlines Co (NYSE: LUV) named a favorite large cap pick and JetBlue Airways Corporation (NASDAQ: JBLU) named a favorite mid-cap pick.

Rating Changes

Shares of American Airlines were downgraded to Hold from Buy with a price target lowered to $58 from a previous $78.Shares of Delta Air Lines were downgraded to Hold from Buy with a price target lowered to $50 from a previous $60.Shares of United Continental were downgraded to Hold from Buy with a price target lowered to $70 from a previous $85.