Barclays Picks United And JetBlue As Top Airliners, Sours On Virgin And Others

Barclays have upgraded two airline stocks, while downgrading three, to better reflect even a "modest risk of recession" over the next year. The brokerage's top pick remains United Continental Holdings Inc UAL and the next best idea is JetBlue Airways Corporation JBLU.

Analyst David Fintzen upgraded JetBlue to Overweight from Equal Weight, saying that a cabin refresh, new pricing strategy and other revenue initiatives would make the airline more "formidable" over the next 12-24 months.

Fintzen raised the rating of Southwest Airlines Co LUV to Equal Weight on relatively better-than-expected RASM (revenue per available seat mile).

"We're still not as bullish as most on LUV, as we don't see the ability to be dominant in the industry as in the pre-9/11 era, nor do we see all that outsized a growth opportunity given the huge scale of LUV today," the analyst wrote in a note to clients.

Meanwhile, Fintzen cut the rating of Aircastle Limited AYR to Underweight due to "fear of fear."

"We think the downside risk is slightly less than peer lessors, but still very substantial. On the other side, we view the upside as more limited versus peer lessors and, probably more relevant in our rating system, to many US airlines," the analyst noted.

Barclays also slashed Allegiant Travel Company ALGT to Underweight, saying that shares are likely more range-bound than others. Fintzen said if oil prices increase, then it would add the double impact of higher costs and a reduction in growth as aircraft utilization is reversed.

Meanwhile, Fintzen downgraded Virgin America Inc VA to Equal Weight following its announced merger with Alaska Air Group, Inc. ALK and the limited downside risk given the interest from JBLU.

In addition, Barclays said its stocks could still rally about 20 percent, on average, if oil rises towards $40-$50/bbl, if not higher. On the other hand, its coverage universe face about 35 percent downside risk if economy slips into a US and global recession during 2016.

On the sector front, the analyst expects domestic RASM should turn positive if this recent rally in oil proves "real" and domestic economic growth accelerates. However, if oil drifts back towards $30 and US GDP remains at around 1 percent, "we think positive RASM becomes highly unlikely in '16, absent noticeable cuts to planned capacity (which we suspect wouldn't materialize given margins)."

The following table shows the rating and price target changes of Barclays on airline stocks: