Wall Street's Patience 'Running Thin' With Airline Stocks

• J.P. Morgan has updated its outlook for U.S airliners.
• The firm sees both negatives and positives in the industry these days, but believes investors are growing impatient.
• The firm has downgraded JetBlue Airways Corporation JBLU from Overweight to Neutral.

In a new report, J.P.Morgan analyst Jamie Baker explains why investors’ patience with airline stocks is running thinner than the air at cruising altitude. The firm has now lowered its projections for industry numbers in 2016 and 2017, and it has downgraded shared of JetBlue from Overweight to Neutral.

The numbers
J.P.Morgan has lowered its 2016 RASM growth projections for the airline industry from +1.3 percent to -2.0 percent. Capacity growth (3.0 percent) and EBIT margins (about 17.0 percent) for 2016 remain unchanged.

For 2017, the firm is calling for flat RASM growth, 3.0 percent capacity growth and a 1.0 percent decline in margins.

The good news
Baker points out that the valuations of many airline stocks remain appealing, and airliners continue to aggressively return capital to shareholders via dividends and buybacks. “Simply put, the industry has never been this prosperous nor better able to weather exogenous shocks, in our view,” he adds.

The bad news
Unfortunately for airline shareholders, even domestic revenue has been contracting of late. With no clear underlying economic driver behind this trend, Baker believes it is likely being caused by “gratuitous discounting” by the airliners.

Baker notes that share price upside might be difficult to achieve until the industry makes progress toward stabilizing/growing revenue numbers.

Stock picks
In the report, J.P.Morgan downgrades JetBlue to Neutral after the stock neared its target of $27.

The firm maintains its Overweight ratings on American Airlines Group Inc AAL, Delta Air Lines, Inc. DAL, Southwest Airlines Co LUV and United Continental Holdings Inc UAL.

It also maintains its Underweight rating on Alaska Air Group, Inc ALK.

Disclosure: the author holds no position in the stocks mentioned.