JPMorgan On Airlines: Consensus Estimates 'Appear Increasingly Unachievable'

Airline stocks are weak Friday following JPMorgan's downbeat assessment of the sector. The firm thinks the current consensus estimates "appear increasingly unachievable" due to current fuel prices and the lack of any apparent vigor in shoring up domestic pricing weakness.

As such, the firm downgraded shares of American Airlines Group Inc AAL, United Continental Holdings Inc UAL and Spirit Airlines Incorporated SAVE. However, the rating on Southwest Airlines Co LUV was upgraded.

JPMorgan sees some like Alaska Air Group, Inc. ALK, Delta Air Lines, Inc. DAL, JetBlue Airways Corporation JBLU and Southwest attractive at current levels, while American Airlines, United and Spirit Airlines aren't so attractive.

The revised ratings and the price targets are as follows:

• American Airlines – downgraded from Overweight to Neutral/lowered from $61 to $53
• United Continental – downgraded from Overweight to Neutral/lowered from $71 to $67
• Spirit Airlines – downgraded from Overweight to Neutral/lowered from $45 to $37
• Southwest Airlines – upgraded from Neutral from Overweight/Raised to $66 from $60

Estimates Reduced Steeply

Analysts Jamie Baker, Nishant Mani and Karan Puri said the fourth quarter consensus implied sequential RASM, or Revenue Per Available Seat Mile, improvement, which according to the analysts is very rare at the industry level.

The analysts stated that despite the meaningful correction the stocks have experienced since last earnings season, the market may not have braced for the magnitude of the fourth quarter disappointment it anticipates.

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Therefore, the analysts lowered their forecasts, which makes the upside potential less abundant than earlier this year. Specifically, the firm's fourth quarter estimate reduction varied from 10 percent at Alaska to 60 percent reductions at United and Spirit Airlines.

The firm estimates fourth quarter earnings per share of 64 cents for United Airlines compared to the consensus estimate of $1.41, and for Spirit Airlines, the firm estimates earnings of 34 cents per share compared to the consensus estimate of 60 cents.

The firm feels the consensus estimates for Delta is reasonable, while those for Alaska and Southwest are reasonably close.

Additionally, the firm also lowered its 2018 estimates, with the exception of JetBlue. Southwest's was lowered by 8 percent, United Continental and Spirit Airlines'were lowered by 33 percent, each.

Self-Inflicted Domestic Pricing Weakness

On domestic pricing weakness, JPMorgan said it's self-inflicted, as it's not related to capacity. Therefore, the firm believes capacity adjustments wouldn't help. If RASM is to improve more than 1 percent in 2018, analysts feel airlines should undertake deliberate efforts to shore up prices.

However, if United Airlines and Spirit Airlines choose to pursue improved domestic pricing, JPMorgan feels the industry will see an improvement in domestic pricing. However, with pricing under pressure and deliberate RASM optimism proving elusive, the firm lowered its opinion on American, United and Spirit Airlines.

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