Most Airlines Are Cleared For Takeoff, But Spirit May Stay Grounded

Previewing the September quarter results of airlines, Deutsche Bank downgraded shares of Spirit Airlines Incorporated SAVE, while it maintained its ratings on others such as Delta Air Lines, Inc. DAL, United Continental Holdings Inc UAL, American Airlines Group Inc AAL, Southwest Airlines Co LUV and JetBlue Airways Corporation JBLU.

Strong Air Travel Demand

Analysts Michael Linenberg and Catherine O'Brien said Delta's recent PRASM, passenger revenue per available seat mile, update of about 2-percent growth, just 1.5 points off the mid-point of its initial guidance, signaled that the sector wasn't impacted much in the past several months by the four hurricanes, the Barcelona and London terrorist attacks, Korea, intense pricing actions and over-supplied Atlantic/Pacific markets.

The analysts also said the Delta update reflected strong underlying demand for air travel, reinforced the importance of diversified revenue base and suggested that the airline's Basic Economy product may be working as anticipated.

Reassurance Sought On Pricing

Deutsche Bank feels in order for stocks to add to/hold onto gains, investors would require reassurance regarding the stabilization of the pricing environment. Quoting from its recent investor survey, the firm said 76 percent expect Spirit Airlines to signal stabilization in the pricing environment, with 19 percent bracing for deterioration in pricing and the remaining 5 percent expecting the airline to say pricing is improving.

See also: Delta Air Lines: A Winner Among Legacy Carriers

Fare Skirmishes Pose Risk

The firm sees risk to the sector's outperformance in the December quarter, a seasonally strong period, if some localized fare skirmishes it is monitoring become full-fledged war. According to the firm, without doubt, this would be bad for airline revenues, earnings and stock prices.

Meanwhile, Deutsche Bank is of the view that the hurricanes and higher fuel prices are having a greater impact on the September quarter bottom line, while increased fare discounting was responsible for lower-than-expected revenue and operating profit.

As such, the firm revised its estimates for most airlines, marking the second earnings cut for many this quarter. The firm lowered the September quarter margins by 1 point and December quarter margins by 0.5 points.

Favorites And The Less Preferred

The firm termed Delta as its favorite, with the company being an industry leader. The firm said American Airlines, which is a higher beta way to play the sector, is also its favorite. With Southwest being a lower beta way to participate, the firm also favored the airline.

If investors are convinced the pricing environment is improving, the firm believed United Continental is likely to be the best performing stock through the end of the year.

Though the firm believes ULCCs, or ultra-low-cost carriers, can co-exist with major airlines, it said Spirit's revenue outlook may face greater downside risk than others, given the competitive intensity of its markets and the uncertain impact of a full roll-out of Basic Economy by the Big 3.

Price Targets

• Delta: Upped price target from $59 to $63.
• JetBlue: Lowered price target from $28 to $26.
• Southwest: Trimmed price target from $64 to $63.
• Spirit Airlines: Lowered price target from $42 to $38.
• United Continental: Lifted price target from $70 to $83.
• American Airlines: Raised price target from $53 to $57.

At Time Of Writing

• Delta shares were up 0.41 percent to $51.89.
• JetBlue was rallying 1.40 percent to $19.56.
• Southwest was seen up 0.39 percent at $58.52.
• Spirit Airlines shares were down 0.37 percent at $35.06.
• United Continental was adding 1.10 percent to $65.03.
• American Airlines was gaining close to 1 percent to $51.04.

Related Link: Jon Najarian Sees Unusual Options Activity In The Airlines Sector ________ Image Credit: By WestportWiki (Own work) [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons