BofA's Mixed Airline Ratings: Upbeat On United's Growth, Cautious On JetBlue's Challenges, Bullish On Delta's Cash Flow

BofA Securities analyst Andrew G. Didora downgraded JetBlue Airways Corporation JBLU to Underperform from Neutral, lowering the price target to $3 from $6. 

After rallying over 56% from the early November trough in share price, the analyst cautions about the challenging domestic airline industry backdrop coupled with GTF engine issues that will likely pressure growth and costs in 2024, continuing to hurt the post-pandemic earnings recovery.

There is further execution risk as the market awaits the judge's ruling in JBLU's lawsuit with the DoJ with regards to purchasing Spirit Airlines, Inc SAVE. 

Airline stocks meaningfully underperformed the market last year (+5% vs S&P 500 +24%), dragged by increasing domestic supply, cost inflation, and normalizing travel demand drove down estimates for domestic airlines, per the analyst.

Didora forecasts a 1.4% capacity decline in 2024 as the number of aircraft out of service due to GTF maintenance nearly doubles from 6 in 4Q23 to over ten by year-end 2024 (approximately 3% of its current fleet).

If the SAVE deal is approved as is, JBLU would pay about $29.70 per share (after pre-payments and ticking fees paid, implying a $3.7 billion equity value and $9.5 billion enterprise value) for an airline that will generate about $400 million of EBITDAR in 2024.

If the deal is not approved, there is likely nearterm relief in JBLU’s share price, the analyst adds.

The analyst upgraded United Airlines Holdings, Inc. UAL to Buy from Underperform, raising the price target to $56 from $40, citing strong balance sheet execution despite high capex, favorable valuation, and steady demand. 

UAL has been opportunistic post-pandemic by being the first mover in the transatlantic and focusing on premium products (business class seat share up 200bps), helping to drive 2023E revenues 24% ahead of 2019 vs peers 16% ahead, according to the analyst.

UAL's capex will remain over $8 billion in 2024/2025 as it takes delivery of approximately 200 narrowbodies and nearly 20 787’s the next two years.

Overall, the analyst forecasts UAL to continue to drive outsized revenue growth vs its peers.

Didora maintained a Buy rating on Delta Air Lines, Inc. DAL, with a price target of $50. 

The analyst expects DAL to continue to generate $4.3 billion in free cash flow in 2024 after returning to meaningful FCF generation in 2023, presenting the biggest differentiator among the big four airlines.

Overall, Didora projects an oversupplied domestic market in 2024 (unless Boeing Company's BA 737 MAX 9 is grounded for a meaningful period) with cost pressures remaining, particularly on maintenance.

Price Action: UAL shares are trading higher by 1.95% to $43.76 on the last check Tuesday, while JBLU shares are trading lower by 10.16% to $5.18.

Photo via United