JPMorgan has issued a wave of downgrades in the airline space, but American Airlines Group Inc. AAL was the lone upgrade in the firm’s latest report. Analyst Jamie Baker said airline investors turned their attention to rising costs in the third-quarter earnings season.
“Costs matter after all, capacity is rising, United’s turnaround appears grounded, and investor patience is wearing thin despite RASM guides that mostly emerged at the better end of expectations,” Baker said (see his track record here).
According to Baker, American and Delta Air Lines, Inc. DAL will lead the group in terms of RASM in 2018. The firm is predicting overall airline RASM growth of 1.7 percent on a 4.5 percent capacity increase next year.
When it comes to costs and margins, Baker said Southwest Airlines Co LUV is the gold standard. Southwest leads the group in ex-fuel CASM. Baker said Southwest will likely also be the only airline to expand EBIT margins in 2018.
JPMorgan upgraded American from Neutral to Overweight and reiterated Overweight ratings for Delta and Southwest. However, the firm downgraded United Continental Holdings Inc UAL from Neutral to Underweight. Baker said he doesn’t see any evidence that the company’s cost-cutting initiatives have improved margins.
JPMorgan also downgraded Alaska Air Group, Inc. ALK and JetBlue Airways Corporation JBLU from Overweight to Neutral and Spirit Airlines Incorporated SAVE from Neutral to Underweight.
Baker says he’s still bullish on the U.S. airline industry as a whole in the long term, but he intends to distribute stock ratings on a relative basis to help differentiate the market leaders and laggards.
In addition to the ratings mentioned above, JPMorgan has the following price targets for the eight airline stocks, ordered alphabetically:
- Alaska: $74.
- American: $65.
- Delta: $68.
- JetBlue: $22.
- Southwest: $67.
- Spirit: $39.
- United: $60.
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