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In a report published Friday, Morgan Stanley analyst Rajeev Lalwani stated that the risk-reward profile for U.S. Airliners has improved recently due to the "precipitous" fall in fuel prices and lowered investor expectations.

According to Lalwani, 2016 consensus estimates for the U.S. Airliners group does not assume in the full benefits of oil prices as current models reflect levels that are around 15 percent higher than the market. On the other hand, the analyst noted consensus estimates also reflects largely unchanged PRASM (passenger revenue per available seat mile) versus his -1 percent due to the "tough environment" remaining.

Nevertheless, Lalwani stated that the decline in fuel prices should prove to be enough for airliners to match earnings expectations even if unit revenues are lower in the 3.5 to 4.0 percent range.

"In our view, positive unit revenues are not necessary for the group to outperform," Lalwani wrote. "In fact, we see airline stocks performing relatively well if they simply meet consensus expectations since it should show an improving trend and a path to more stable prices."

'Likely' Outperformers

Lalwani stated that American Airlines Group Inc (NASDAQ: AAL) has seen "the weakest" PRASM results due to international and domestic pressures. Should the company's unit revenue meet the already lowered expectations and show an improving trajectory, the stock is likely to outperform.

However, the trade in American Airlines has integration risk and a safer trade may be Delta Air Lines, Inc. (NYSE: DAL) or United Continental Holdings Inc (NYSE: UAL) – both of which have experienced PRASM underperformance but to a lesser extent.

Spirit Airlines Incorporated (NASDAQ: SAVE) was also listed as a likely outperformer given its limited profit sharing and fuel hedges and a stronger margin. As such, the stock could see "considerable" multiple expansion due to its industry-leading, low-cost growth profile.

…And The Rest

  • Alaska Air Group, Inc. (NYSE: ALK) should see an "improving" trajectory for PRASM as competitive capacity gets lapped.
  • Allegiant Travel Company (NASDAQ: ALGT) and JetBlue Airways Corporation (NASDAQ: JBLU) could both lag the group as they have to-date benefited from their "insulated" networks that support stronger pricing that may come under pressure.
  • Hawaiian Holdings, Inc. (NASDAQ: HA)'s international network exposes it "more significantly" to fuel surcharges.
  • Southwest Airlines Co (NYSE: LUV) is likely to continue seeing competitive pricing actions in key markets which will create pressure on unit revenues (which will only be partially offset from a credit card agreement).
  • Virgin America Inc (NASDAQ: VA) continues to grow into competitive markets and competitive pressures will worsen while its peers will see improvements.

Latest Ratings for AAL

Apr 2018Morgan StanleyMaintainsEqual-WeightEqual-Weight
Feb 2018Morgan StanleyMaintainsEqual-WeightEqual-Weight
Jan 2018BernsteinUpgradesMarket PerformOutperform

View More Analyst Ratings for AAL
View the Latest Analyst Ratings

Posted-In: Morgan Stanley Rajeev Lalwani US AirlinersAnalyst Color Long Ideas Top Stories Analyst Ratings Trading Ideas Best of Benzinga


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