Morgan Stanley's Rajeev Lalwani analyzed airline stocks under the context of lower oil prices.
In the firm's Question of the Week, Lalwani asked: "What do you prefer (A) low oil, limited capacity discipline, and higher profits or (B) high oil, increased capacity discipline, and lower profits?" The investors that Morgan Stanley polled "overwhelmingly" supported scenario B, to the tune of 76 percent of respondents.
That response, the note said, did not catch Lalwani by surprise as the group has underperformed year-to-date in the low oil environment. However, unlike investors, Lalwani said that the firm believes that "the group can do well in an environment with low oil and limited discipline, though we need the carriers to restore our confidence."
That discipline is unlikely to come from the smaller carriers, the note suggested.
"We are not surprised to see elevated supply as airlines move to capitalize on the profit opportunity, particularly the smaller carriers," the note said.
However, the firm argued that the legacy carriers can be the ones to demonstrate discipline and balance supply and demand – expecting the Q2 earnings to result in domestic capacity cuts of 1-2 percent for H2.
Oil's decline created an environment where the airlines will "achieve record profitability and return significant capital to shareholders," which Morgan Stanley "finds supportive" of long-term share prices.
Amongst the airlines, JetBlue Airways Corporation JBLU has been the standout, gaining more than 41 percent year-to-date. That performance is even more distinguishing when comparing against its peers – all down around 20 percent on the year. Southwest Airlines Co LUV dipped 20 percent since the start of the year; American Airlines Group Inc AAL lost 22 percent; and Spirit Airlines Incorporated SAVE shed 22 percent.
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