Wall Street's Patience 'Running Thin' With Airline Stocks

• JP Morgan has updated its outlook for U.S. airliners.
• The firm sees both negatives and positives in the industry these days, but believes investors are growing impatient.
• The firm has downgraded JetBlue Airways Corporation (NASDAQ: JBLU) from Overweight to Neutral.

In a new report, JP Morgan analyst Jamie Baker explained why investors’ patience with airline stocks is running thinner than the air at cruising altitude. The firm has now lowered its projections for industry numbers in 2016 and 2017, and it has downgraded shared of JetBlue from Overweight to Neutral.

The Numbers

JP Morgan has lowered its 2016 RASM growth projections for the airline industry from +1.3 percent to -2.0 percent. Capacity growth (3.0 percent) and EBIT margins (about 17.0 percent) for 2016 remain unchanged.

For 2017, the firm is calling for flat RASM growth, 3.0 percent capacity growth and a 1.0 percent decline in margins.

Related Link: Why Airliners Could Keep The Party Going This Earnings Season

The Good News

Baker pointed out that the valuations of many airline stocks remain appealing, and airliners continue to aggressively return capital to shareholders via dividends and buybacks. “Simply put, the industry has never been this prosperous nor better able to weather exogenous shocks, in our view,” he added.

The Bad News

Unfortunately for airline shareholders, even domestic revenue has been contracting of late. With no clear underlying economic driver behind this trend, Baker believes it is likely being caused by “gratuitous discounting” by the airliners.

Baker notes that share price upside might be difficult to achieve until the industry makes progress toward stabilizing/growing revenue numbers.

Stock Picks

In the report, JP Morgan downgraded JetBlue after the stock neared its target of $27.

The firm maintains its Overweight ratings on American Airlines Group Inc (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL), Southwest Airlines Co (NYSE: LUV) and United Continental Holdings Inc (NYSE: UAL).

It also maintains its Underweight rating on Alaska Air Group, Inc (NYSE: ALK).

Disclosure: the author holds no position in the stocks mentioned.