Raymond James analyst Savanthi Syth downgraded Mesa Air Group Inc MESA and SkyWest Inc SKYW to Underperform as she believes the pilot rates being established across the regional industry will diminish the earnings power of regional airlines.
American Airlines Group Inc AAL, which has about 55% of regional lift at in-house regional airlines, thought there was a cost advantage due to the lack of a margin that could significantly improve pilot pay at these entities, driving operational stability and resulting in market share gains in a lucrative market segment.
This led to junior pilot pay moving closer to and, in some cases, above that of the lowest-paid mainline carriers.
This bet by American set off a domino effect whereby the pay rise was matched by other regional airlines.
The earnings pain, Syth added, will persist over the next two years despite the view that the pilot supply issue should gradually improve starting in the next 12-18 months.
Syth thinks the challenge is likely to drive consolidation and strengthen the position of industry leaders, such as SkyWest, but there is likely to be more pain ahead before things start to improve.
The only opportunity for third-party regional airlines to pass through pay increases is at the time of contract renewals, cited the analyst.
The analyst also upgraded Allegiant Travel Co ALGT to Outperform as it is likely better positioned to both withstand the fallout from the regional airline industry dynamics and possibly to take advantage of the likely reduced service in smaller markets.
She downgraded Frontier Group Holdings Inc ULCC to Market Perform from Outperform.
Price Action: AAL shares closed up 0.50% at $13.96 on Thursday.
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