Morgan Stanley's Airline Recovery Stock Picks: Why Analyst Is Bullish On Delta, Bearish On United

The airline sector will see an eventual recovery in traffic, and investors should hold an attractive view of the industry, according to Morgan Stanley.

The Airline Analyst: Ravi Shanker initiated coverage of the following airline stocks:

Alaska Air Group, Inc. ALK at Equal-weight, $46 price target.

Allegiant Travel Company ALGT at Overweight, $175 price target.

Delta Air Lines, Inc. DAL at Overweight, $50 price target.

JetBlue Airways Corporation JBLU at Overweight, $16 price target.

Southwest Airlines Co LUV at Overweight, $54 price target.

United Airlines Holdings Inc UAL at Underweight, $37 price target.

Airlines In A Post-Coronavirus World: The COVID-19 pandemic has had an "unprecedented" impact on airlines, Shanker said in a Tuesday note.

Recent data from the TSA shows that traffic has improved from being down nearly 100% year-over-year to 75% to 80%, the analyst said. 

While there is no "crystal ball" to determine when the industry will recover, International Air Transport Association estimates call for a return to 2019 levels by the end of 2023 or early 2024, according to BofA. 

Yet global GDP should return to pre-COVID-19 levels as soon as the fourth quarter of 2020, with a full U.S. recovery by the end of 2021, Shanker said.

This pace of recovery is much faster than prior recessions, and air traffic demand should also rebound much faster than prior cycles, the analyst said. 

Morgan Stanley's air travel demand timeline is more bullish, and the firm said revenue passenger miles should return to pre-pandemic levels on a run-rate basis by early 2022 at the latest.

Airliners with high domestic leisure exposure, medium haul lengths, strong customer loyalty and/or attractive fares will "see demand come back first," he said. 

Is The Worst Over? The federal government will likely introduce a CARES 2 or Payroll Support Program to maintain the status quo, Shanker said. 

Cash burn is "relatively under control," and many airlines will have little issue with tapping private market fundraising or further government programs for support, the analyst said. 

"We believe the worst of imminent liquidity risk is past us but we still prefer companies with the most balance sheet 'firepower' and least restrictions from government financial assistance."

A Jet Fuel Catalyst: Jet fuel prices are likely to remain "relatively low and steady" over the next one to two years, Shanker said.

Since jet fuel ranks as the second biggest cost for airlines, lower prices will serve as a margin and sentiment catalyst, the analyst said. 

The Valuation Debate: Investors aren't "overly focused" on airline stock valuations given the "binary nature" of the potential outcomes ahead, he said.

A quick volume recovery should justify the airline sector trading at consistent multiples with other cyclicals, including a long-term average of 10 times PE and 4.5 times EV/EBITDAR on 2022 estimates, Shanker said.

For the time being, investors may want to avoid chasing high beta stocks until a vaccine is widely available and/or there are new signs of an industry recovery, the analyst said: 

Airline Price Action: Shares of Alaska Air were trading 4.07% higher at $42.49 at last check Tuesday.

Shares of Allegiant were trading higher by 3.57% to $138.43. 

Shares of Delta were trading up 3.97% at $33.03. 

Shares of JetBlue were trading higher by 5.89% at $12.84.

Shares of Southwest were gaining 3.17% to $40.65.

Shares of United Airlines were down 0.08% at $38.18.

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