Credit Suisse Warns Airline Investors: Improvements May Only Be Modest

• Credit Suisse sees low consensus expectations for the Q3 earnings of airlines.
• The firm is calling for modest improvement from airlines in Q4 and into 2016.
• Credit Suisse names Southwest Airlines Co LUV, Delta Airlines, Inc. DAL and United Continental Holdings Inc UAL as its top picks.

As Q3 earnings season approaches for airline stocks, Credit Suisse analyst Julie Yates remains positive on most of the major names in the space, but believes that performance throughout the rest of the year will likely not be very impressive. In a new report, Yates discusses what’s ahead for airline investors in Q4 and 2016 and which stocks traders should be buying now ahead of Q3 earnings.

Q3 expectations are low
According to Yates, Credit Suisse believes that Q3 earnings expectations for the airliners are relatively low due to fears surrounding the revenue environment and concerns that PRASM forecasts for Q4 could be nearly as bad as Q3 PRASM declines were.

“Retention of initial Q3 PRASM guides suggest some stability, but investors remain skeptical that international capacity cuts at the legacies and easing comps are enough to offset softening yields in a lower fuel environment,” she explains.

Prior to the quarter, consensus expectations were that Q3 would represent the trough in year-over-year (Y/Y) unit revenue growth for airlines.

Modest improvement
With expectations low heading into Q3 earnings season, Yates believes that airlines are poised for only modest improvements in capacity growth in Q4.

Credit Suisse anticipates that most airlines will offer their first glimpse at 2016 capacity growth plans during Q3 earnings, and Credit Suisse is predicting guidance of about 4-5 percent Y/Y capacity growth for 2016.

Stock picks
Ahead of Q3 earnings, Credit Suisse recommends Outperform-rated Southwest Airlines, Delta Airlines, and United Continental as its top picks.

The firm has a more cautious outlook for Neutral-rated American Airlines Group Inc AAL and Spirit Airlines Incorporated SAVE.

Disclosure: the author holds no position in the stocks mentioned.