6 Airliners Morgan Stanley Is Watching Before Earnings

In a report published Monday, analysts at Morgan Stanley provide a preview of the first quarter for airliners. While fuel-induced short-term volatility lingers, the firm remains long on the industry. As fuel remains low, they continue to see “meaningful margin expansion and a cash windfall which we [the analysts] believe warrants long positioning for those that can weather the storm. Weak international and strong domestic trends have also created a bifurcation in the group, with most network carriers underperforming their low-cost peers. That said, we’ve seen evidence of slower capacity additions among the network carriers supporting the long-term thesis on the airlines.”

Broadly, the analysts maintained estimates (mostly ahead of consensus) and price targets for 2015 and 2016, although some companies saw some changes.

The firm highlights three focus points for earnings:

1. Capacity growth acceleration: the analysts “suspect some airlines will increase capacity during off-peak periods considering the low fuel environment, most recently evidenced by Allegiant Travel Company’s capacity guidance update highlighting significant growth in upcoming quarters. That said, most of the network carriers continue to speak to capacity discipline, with American Airlines recently cutting capacity growth vs. prior guidance for 2015 and Delta Air Lines looking to revisit its growth plans post the summer travel period.”
2. Revenues could also be under pressure going forward.
3. “Rising Capital Returns and Continuing Deleveraging.”

For the first quarter, Morgan Stanley expects earnings of:

• $1.72, down from $1.85 for American Airlines Group AAL
• $3.69, up from $3.43, for Allegiant ALGT
• $1.10, down from $1.17, for Alaska Air Group, Inc. ALK
• $0.45, down from $0.48, for Delta Air Lines, Inc. DAL
• $0.99, unchanged, for Spirit Airlines Incorporated SAVE
• $1.50, up from $1.08, for United Continental Holdings Inc UAL