Barclays Wants To Shred The Old Airline Investor Clichés

The airline industry had changed, with profitability and balance sheets looking sustainable and stocks appearing “objectively cheap,” Barclays’ Brandon R. Oglenski said in a report. He commented that while the past had been “rocky,” active investors should “look forward instead of staring behind.”

The Industry Had Changed

Consolidation within the United States had not only resulted in a structural change in competition, but also “helped level the playing field” on operating costs, analyst Oglenski mentioned. The four majors now controlled 86 percent of revenue.

Declining fuel prices would likely enable airlines to record higher earnings than they did last year. The companies had already more than doubled their margins.

Rational capacity decisions, based on both input costs and economic conditions, had created “an environment for airlines to manage the business cycle as effectively as, if not even better than, most other operationally levered industrial companies,” Oglenski wrote.

Stock Valuations

Airline stocks were currently trading at the low end of the S&P500, despite being at “roughly middle of the pack” in margins, returns and balance sheet strength, the analyst pointed out. He added that the stocks were trading at a discount of around 50 percent to other large cap industrial stocks with similar margins.

Oglenski maintains the ratings and price targets at:

• Alaska Air Group, Inc. ALK: Overweight, $122.
• Allegiant Travel Company ALGT: Underweight, $166.
• American Airlines Group Inc AAL: Equal Weight, $52.
• JetBlue Airways Corporation JBLU: Overweight, $33.
• Southwest Airlines Co LUV: Equal Weight, $65.
• Spirit Airlines Incorporated SAVE: Equal Weight, $67.
• United Continental Holdings Inc UAL: Overweight, $105.