3 Airlines Bank of America Expects To Fly Higher In 2018

The federal tax cut is giving corporations a little extra cash to work with, and Bank of America Merrill Lynch said airlines could take advantage of their clients’ expanded spending power.

The Rating

BofA Merrill Lynch analysts Andrew Didora and Emma Young upgraded American Airlines Group Inc AAL from Underperform to Buy and Spirit Airlines Incorporated SAVE and Allegiant Travel Company ALGT from Neutral to Buy.

BofA maintained Buy ratings on Delta Air Lines, Inc. DAL and United Continental Holdings Inc UAL.

Southwest Airlines Co LUV and Alaska Air Group, Inc. ALK caught downgrades from Buy to Neutral and JetBlue Airways Corporation JBLU from Buy to Underperform.

The Thesis

The analysts expect a tax-related increase in corporate spending to drive a long-anticipated hike in corporate airline pricing.

“We expect leisure to remain the steady component it has been this cycle, but we estimate corporate pricing is down 14 percent over the past several years,” the analysts said in a Tuesday note. “A recovery here should benefit the legacy airlines, given about two-thirds of their revenue comes from corporate.”

Delta, United and American stand to profit from their corporate exposure, compounding anticipated outperformance in international flights, according to BofA. 

Their hikes should boost the industry's passenger revenue per available seat mile, which is down 7 percent from 2014’s peak, the analysts said. With Spirit and Allegiant down a respective 25.4 percent and 13.5 percent, the low-fare lines boast significant growth opportunity. 

Leisure carriers caught Bank of America downgrades primarily in accordance with the analysts’ Barbell strategy.

Price Action

At the time of publication, Delta was down nearly 1 percent and JetBlue was up 0.66 percent. Allegiant was up 1.86 percent, Spirit 0.56 percent, American Airlines 0.55 percent and United 0.36 percent. Southwest was down 1.44 percent and Alaska 1.31 percent.

U.S. Global Jets ETF JETS traded was down slightly at $32.40. 

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