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Morgan Stanley Is Not Backing Down On Airlines. Should You?

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Morgan Stanley Is Not Backing Down On Airlines. Should You?

In a report published Tuesday, Morgan Stanley analyst Rajeev Lalwani commented on the U.S. airline sector, noting that the recent drop in fuel prices is offsetting what would have been "large" downward revisions to his earnings estimates.

According to Lalwani, PRASM (passenger revenue per available seat mile) outlook for the group were mostly a "disappointment" by 200 basis points. However, jet fuel prices have fallen around 15 percent since early July, and serves as an offset to potential downward revisions.

"That being said, the recovery in unit revenues remains elusive and continues to get pushed out with subdued pricing likely to continue through year-end," Lalwani wrote. "Regardless, risk-reward is skewed to the upside and we remain positive on airlines fundamentally given the balancing of supply-demand over time, substantial capital returns, and attractive valuation multiples."

Related Link: A Deeper Look Into Airlines, And The Rise Of The 'Global Middle Class'

Lalwani's comments may contrast those issued by Imperial Capital analyst Bob McAdoo who argued in a note recently that the best indication of the performance of an airline isn't a metric like PRASM, rather, it should be good old-fashioned profits.

McAdoo further noted that reducing capacity by cutting profitable flights with the objective of boosting revenue per available seat mile metrics is not an ideal way to run a business. Rather, the primary focus should always be on the bottom line.

Lalwani's comments also come at a time when the Airlines ETF, U.S. Global Jets ETF (NYSE: JETS) is trading near its 52-week highs of $25.20.

Benzinga spoke with Frank Holmes, CEO and CIO of U.S. Global Investors (the ETF's operator) who noted that second-quarter earnings beats by the airline sector were due to investor bearishness, specifically over capacity pricing concerns.

The executive also shared a similar bullish outlook for the industry, as Brent Crude Oil dipping to the $50 level represented a "big win for airlines."

Rating And Price Target Updates

  • Shares of Alaska Air Group, Inc. (NYSE: ALK) were maintained at Overweight with a price target raised to $97 from a previous $87.
  • Shares of Allegiant Travel Company (NASDAQ: ALGT) were maintained at Equal-weight with a price target raised to $239 from a previous $214.
  • Shares of American Airlines Group In (NASDAQ: AAL) were maintained at Equal-weight with a price target lowered to $48 from a previous $51.
  • Shares of Delta Air Lines, Inc. (NYSE: DAL) were maintained at Overweight with a price target lowered to $61 from a previous $65.
  • Shares of Hawaiian Holdings, Inc. (NASDAQ: HA) were maintained at Underweight with a price target lowered to $25 from a previous $26.
  • Shares of JetBlue Airways Corporation (NASDAQ: JBLU) were maintained at Equal-weight with a price target raised to $27 from a previous $25.
  • Shares of Southwest Airlines Co (NYSE: LUV) were maintained at Underweight with a price target raised to $41 from a previous $40.
  • Shares of Spirit Airlines Incorporated (NASDAQ: SAVE) were maintained at Overweight with a price target lowered to $72 from a previous $80.
  • Shares of United Continental Holdings Inc (NYSE: UAL) were maintained at Overweight with a price target lowered to $92 from a previous $93.
  • Shares of Virgin America Inc (NASDAQ: VA) were maintained at Underweight with a price target raised to $34 from a previous $31.

Latest Ratings for AAL

DateFirmActionFromTo
Jan 2021SusquehannaMaintainsNegative
Dec 2020Deutsche bankDowngradesBuyHold
Nov 2020Raymond JamesDowngradesMarket PerformUnderperform

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