HSBC Sees Blue Skies For Airline Industry, Forecasts Strong Recovery And Consolidation

HSBC analyst Achal Kumar initiated coverage on several airline stocks. The analyst writes that there is a continued recovery in corporate travel, stronger international demand, tighter capacity, and pandemic-driven behavioral changes in the industry.

The analyst says that the cost pressures may not fade in the near term but expects profitability to improve, a manageable capital expenditure cycle and the industry to see some consolidation.

The analyst initiated coverage on Delta Air Lines, Inc. DAL at a buy rating with a price target of $72.80.

The analyst says that Delta Air Lines is their preferred stock, given its strong competitive positioning across all its key hubs and high penetration in premium traffic (which derives about 45% of revenue from premium cabins).

Also, Delta has the biggest loyalty membership base (around 120 million members), a balanced network, and a strong management team, writes the analyst. 

Kumar initiated coverage on American Airlines Group, Inc.AAL at a Buy rating and a price target of $17.90.

The analyst writes that the company has a strong position in the Atlantic and LatAm markets, both of which are performing well, and it significantly benefits from its partnership with Alaska Airlines Group, Inc. ALK, which has a strong presence on the West Coast. 

Also, the company has deployed almost 64% of its capacity in the domestic market, higher than peers (54%: United; 62%: Delta).

The analyst initiated coverage on United Airlines Holdings, Inc.UAL at a Buy rating with a price target of $69.20.

Kumar writes that United Airlines is a riskier investment option with the highest potential return (ROIC), given its highest capex commitment over the next 5-6 years.

United Airlines has a fairly balanced network, with nearly 50% of its capacity deployed in the international market, where demand remains strong. Also, the company expects profitability to improve in this operationally geared business with the increase in capacity.

The analyst initiated Southwest Airlines Company LUV at a Hold rating and a price target of $27.80.

Kumar says that the airline is the biggest low-cost airline in the U.S., with 817 aircraft (90% owned), and its unit cost is almost 10% lower than UAL, 15% lower than American Airlines, and about 24% lower than Delta Airlines.

Also, the analyst writes that its ex-fuel unit cost was 9% lower than  American Airlines, 13% lower than Delta and about 6% lower than United Airlines.

The analyst liked the company’s balance sheet and lower unit cost but revealed concern about the cost pressure and dependency on Max aircraft.

Price Action: DAL shares are trading higher by 1.63% at $53.35, AAL by 3.78% at $14.94, UAL by 3.11% at $54.36, and LUV by 3.20% at $28.24 at the last check Monday.

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