Goldman On Airlines: 'This Time Is Different'...Might Not Be Correct

Goldman Sachs commented on airlines Thursday following news that PRASM declined in April.

Analysts Tom Kim and Rob Norwood noted that U.S. airline stocks dropped an average of 6.6 percent on Wednesday, which the analysts attributed to “investor concerns around domestic pricing and capacity discipline.”

The analysts felt the reaction in the stocks was an “important reminder” that investors are closely watching the industry and “monitoring carrier behavior.”

Overall, the firm maintained Buy ratings on Southwest Airlines Co LUV, Delta Air Lines, Inc. DAL, American Airlines Group Inc AAL and Spirit Airlines Incorporated SAVE because they looked “deeply undervalued relative to their improved earnings power.”

Related Link: Why Airline Stocks Were Getting Killed Wednesday

Kim recommended accumulating shares on weakness and thought the stocks might be range-bound in the near-term until capacity and pricing concerns were resolved.

Looking at some of the stocks individually, Kim said that the market may have been disappointed that Southwest Airlines “raised its 2015 capacity growth again" from 7 percent to 8 percent.

A greater impact on investor sentiment, according to the analysts, may have come from news on May 19 that American Airlines “would compete aggressively against low cost carriers (LCC) on price to defend share.”

Kim added that domestic pricing and capacity behavior had been rational with only a few pockets where capacity had grown disproportionately, but overall ASM at +3.2 percent had been increasing largely in-line with RPM at +2.9 percent year-to-date.

In summing up their views, the analysts stated, “We do not ascribe to the ‘this time is different’ thesis but one does not have to be bullish. Our Attractive view of US airlines is based on improved earnings power from a healthy supply/demand balance, improved pricing power on high load factors, higher net margins from structurally lower capital costs, strong FCF generation, moderate financial leverage and capital return initiatives. We think that the industry needs to go through at least one full up and down cycle to know whether ‘this time is different.’”

Looking ahead, the analysts expected “domestic yields to improve sequentially from 3Q as capacity growth slows” and noted the consensus view that US GDP would accelerate in the second half of 2015 “which would benefit both corporate and leisure travel.”