MKM Partners' Top Picks In Airline Sector For 2022

MKM Partners analyst Conor Cunningham believes that the new year will be a key moment of transition for airlines as they seek to turn a modest profit despite continued COVID-19 headwinds.

• Cunningham mentions that while U.S. airlines have been trading in tandem during the pandemic, they will begin to bifurcate in a post-pandemic environment. Carriers that benefit from international and corporate recovery or have a compelling cost story will be this year's winners, he added.
• The analyst's top pick for 2022 was Delta Air Lines Inc DAL, followed by Alaska Air Group Inc ALK. American Airlines Group Inc AAL and United Airlines Holdings Inc UAL secured honorable mentions.
• Cunningham's lowered the price target for Alaska Air to $69 from $78; American Airlines to $23 from $27; United Airlines to $54 from $55; and maintained a $50 price target for Delta.
• In response to impacts from winter weather and the omicron variant, Delta Air Lines expects to cancel roughly 500 flights for Monday, January 3, 2022, with about 200 cancellations per day expected into Tuesday and Wednesday.
• Cunningham upgraded United Airlines to Buy from Neutral as he believes it to be the largest beneficiary of an international travel recovery in 2022. He also pointed to United's continued strength in domestic travel and cost-saving initiatives of about $2.2 billion.
• He furthers added that United plans to bring back 52 model 777s, which will allow the "fleet to normalize," even with continued delays for Boeing Co BA 787 deliveries and Omicron headwinds.
• MKM expects U.S. airline industry capacity in 2022 to be nearly in line with 2019 as airlines rush to meet growing demand. Cunningham anticipates international travel will pick up later this year, as nations continue to ease travel restrictions, with corporate travel modestly improving by March or April.
• Cunningham states that in the short term, the rapidly transmissible Omicron variant is likely to affect bottom lines during the first quarter of 2022.
• The analyst downgraded Southwest Airlines Co (NYSE: LUV) from Buy to Neutral and lowered the price target to $45 from $54.
• MKM believes Southwest's valuation is extended compared to the rest of the industry, seeing a strong likelihood that the airline will come in at the low end of its estimates next year.
• The analyst downgraded Spirit Airlines Inc (NYSE: SAVE) from Buy to Neutral and lowered the price target to $25, from $31.
• Spirit's downgrade was spurred by slightly higher costs in 2023 as the airline seeks to expand by 50% compared to its size in 2019. While many airlines strive to add capacity and maintain network integrity, Spirit will need to "take their foot off the capacity accelerator to maintain network integrity which will further exacerbate a cost bubble in 2022," mentions Cunningham. 
• The analyst downgraded JetBlue Airways Corp (NASDAQ: JBLU) from Neutral to Sell and lowered the price target to $13 from $17.
• Cunningham sees an even more challenging year ahead for JetBlue, which is ramping up its flight capacity so that the analyst foresees will negatively impact revenue per available seat mile.
• Price Action: DAL shares are trading higher by 3.59% at $40.48 on the last check Monday.