Fundamentals, Expectations For The Big 3 Airliners May Be Peaking

Imperial Capital in a note Wednesday said it believes fundamentals and expectations are peaking for United Continental Holdings Inc UAL, Delta Air Lines, Inc. DAL and American Airlines Group Inc AAL. This follows almost eight years of economic expansion.

Giving the rationale for the expectations, analysts Michael Derchin and Adam Hackel listed several factors:

• Labor costs issues and unrest are beginning to subside as the economic cycle reaches its last leg.
• Load factor, which is the ratio of traffic to capacity, has begun to peak. This has forced the airlines to fall back on fare increases to boost unit revenue growth, which has become a major theme in the second and third quarters of 2017.
• The demand-supply equation is seeing imbalance, as airlines add more capacity relative to demand. This has exerted pressure on unit revenue growth, suggesting a looming risk in the fourth quarter of 2017 and into 2018.
• Aggressive scheduling the airlines are resorting to, in key markets has helped them gain at the expense of competition, given that the market share has become a zero sum gain. This, according to Imperial, is happening at United Continental in Chicago and Alaska Air Group, Inc. ALK in California.
• Skeptics in the investor community are radically changing their views and becoming more positive on the group. A case in point in Warren Buffett-led Berkshire Hathaway's recent regulatory filing, which showed it has dug deep into American Airlines and Southwest Airlines Co LUV, although shed its stake in Delta Airlines. This is a radical shift from Buffett's earlier stance that the sector is a death trap for investors.

Rating/Valuation

Imperial Capital has In-line ratings on United Continental, Delta Air Lines and American Airlines. The price target for each of these companies are as follows:

• American Airlines - $43
• Delta Air Lines - $52
• United Continental - $75

The Outperform-rated stocks in the firm's coverage universe are Southwest Airlines, JetBlue Airways Corporation JBLU, Spirit Airlines Incorporated SAVE and Atlas Air Worldwide Holdings, Inc. AAWW.

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