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DOJ Investigation Raises Near-Term 'Uncertainty' For Airliners, Morgan Stanley Warns

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In a report published Thursday, Morgan Stanley analyst Rajeev Lalwani mentioned that the outcome of latest investigation initiated by the DoJ "may not be onerous," but it adds to the group's "already uncertain near-term outlook."

The Department of Justice (DoJ) has initiated an investigation into several US airlines to determine whether they are "colluding" and growing capacity at a slower pace to drive prices higher. Analyst Rajeev Lalwani said that this "comes as a surprise" in view of the "elevated capacity" and weak prices in the sector.

In the report Morgan Stanley noted that the passenger unit revenues were down about 2.5 percent year-to-date and are "essentially unchanged" at around 1.5 percent, on an inflation-adjusted basis, over the last decade. While there were expectations of "substantially lower airfares" on account of the substantial downturn in oil prices, "we note that historically airlines have not fully passed on higher or lower fuel-related costs to customers."

Referring to capacity, Lalwani pointed out that domestic supply was likely to increase by about 5 percent this year, versus an average of 1 percent over the past 5 years, and remained "elevated per our projections into 2016/2017."

"Lastly, based on current market dynamics the US Airline sector appears fairly competitive as highlighted by aggressive price and supply dynamics in key markets such as Dallas, Transcon, and Chicago, where many of the mentioned carriers operate," Lalwani added.

Morgan Stanley has an Equal Weight rating on American Airlines Group Inc (NASDAQ: AAL) and an Overweight rating on both Delta Air Lines, Inc. (NYSE: DAL) and United Continental Holdings Inc (NYSE: UAL).

Latest Ratings for AAL

Feb 2017BernsteinUpgradesUnderperformMarket Perform
Jan 2017Cowen & Co.DowngradesOutperformMarket Perform
Dec 2016BarclaysInitiates Coverage OnEqual-Weight

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