Deutsche Bank, Morgan Stanley Previews Airliners

As earnings season kicks in to high gear, analysts at Deutsche Bank and Morgan Stanley offered their thoughts and expectations for the airline sector.

Michael Linenberg of Deutsche Bank commented in a note on Sunday that the U.S. airline sector as a whole is expected to report a quarterly profit of $6.3 billion, marking an increase from the $5.0 billion the sector earned in the same period a year ago. The analyst is also expecting operating margins to expand 3.8 points to 17.6 percent. "While our forecast implies a record for the June Q, it incorporates a 1.6% decline in top-line; lower fuel expense accounts for more than double the improvement in operating and pretax profits," Linenberg wrote. "For that reason, we have seen investors ascribe lower valuations to fuel-driven earnings growth, particularly for major airlines which are bearing the brunt of the revenue declines." Linenberg also noted that downside risk to earnings per share in the back half of 2015 and full year 2016 has been "mitigated" by recent pullbacks in jet fuel prices. In fact, every $1 per barrel move in jet fuel prices impacts industry pretax profits by $400 million. The analyst also added that the Department of Justice's investigation in to possible price collusion represents only "headline risks" and in reality air fares lag inflation and personal income growth. Finally, Linenberg suggested that investors favor domestic names such as

and

in addition to companies with a "self-help" element underlying their investment thesis such as

and

.

Rajeev Lalwani of Morgan Stanley offered three key points for investors to follow in the second quarter. First, Lalwani noted that he is seeing "limited" signs of capacity growth easing heading into the second half of 2015. In addition, with yield weakness in the domestic region, the analyst is expecting further capacity cuts to be announced during the earnings season. Second, Lalwani stated that with recent softness in yields in the domestic region, he is expecting more downside risk than upside to upcoming PRASM (passenger revenue per available seat mile). Based on the analyst's survey work, expectations for third quarter PRASM stands at negative four percent year over year, with the potential to reach a level similar to those seen in the second quarter of negative six percent. Finally, the analyst highlighted that the near-term revenue environment is still "challenging," but he remains positive on airlines fundamentally. In addition, airliners should continue generating "strong" free cash flows and deliver "robust" capital returns to shareholders in the coming quarters.