The U.S. airline carriers have been given a deep-dive review from Credit Suisse on Monday as the firm initiated coverage on the sector. Credit Suisse initiated airline sector coverage with an Overweight industry view. That said, due to the methodology of Credit Suisse’s peer-relevant rankings rather than outright performance metrics, some investors might have taken this sector call with some caution.
The report talked up clear structural improvements in the airline industry and sees strong revenue trends ahead in 2019, and the firm even thinks the airlines can offset the cost pressure headwinds and see higher margins in 2019 for the first time in 4 years. Another boost is the resurgence of capacity discipline and “revenue vigor” at a time when higher input costs (fuel) will likely drive a rerating as pricing and margins inflect.
As a reminder, Warren Buffett and Berkshire Hathaway made some changes to their airline holdings in the third quarter. Also, most analyst buy and Outperform ratings are generally coming with about 10% in implied upside to the price targets in Dow and S&P 500 stocks.
One interesting aspect of the airline sector call here is that Credit Suisse noted that higher oil prices are actually a long-term positive. The report said:
While the short-term impact of a rapid run-up in fuel is a negative, this is largely a function of timing given the lag to recover these costs through revenue. However, the higher input costs force capacity discipline back into the market at the same time that it reinvigorates the focus on the top line.
Alaska Air Group, Inc. (NYSE: ALK) was started as Outperform and was assigned a $81 price target (versus $67.99 close) at Credit Suisse. The firm also named Alaska Air as its top pick in the airline sector, and the shares were last seen trading up 0.65% at $68.10. Its consensus analyst target price from Thomson Reuters was $77.85.
American Airlines Group Inc. (NASDAQ: AAL) was started as Neutral and was assigned a $41 price target (versus $36.75 close). American Airlines shares were last seen down 0.5% at $36.55 after the Credit Suisse call.
Delta Air Lines, Inc. (NYSE: DAL) was started as Outperform and was assigned a $71 price target (versus $55.90 close) at Credit Suisse. Delta was last seen up almost 1% at $56.42 on Monday.
JetBlue Airways Corporation (NASDAQ: JBLU) was started as Underperform and was assigned a $16 price target (versus $18.03 close) at Credit Suisse.
Southwest Airlines Co. (NYSE: LUV) was started as Neutral and was assigned a $54 price target (versus $52.58 close). Credit Suisse sees Southwest shares as looking rangebound given 2019 cost pressures. Southwest Airlines was last seen down just 3-cents at $52.55 on Monday morning after this call.
Spirit Airlines, Inc. (NYSE: SAVE) was started as Neutral and was assigned a $59 price target (versus $52.44 close). While the valuation may be higher, Credit Suisse still sees Spirit Air as the strongest airline growth story. Spirit Air was down 1.7% at $51.54 on Monday after the call.
United Continental Holding, Inc. (NYSE: UAL) was started as Outperform with a $113 target price. The firm believes that United Continental is solving the domestic network strategy to drive the airline’s turnaround. United Continental previously closed at $92.26, and it was up 0.4% at $92.60 on Monday morning.
Credit Suisse’s Jose Caiado De Sousa said of the sector call:
This is still a cyclical industry, but we believe its investment profile has significantly improved relative to prior cycles, following a very challenging decade in the 2000s that brought about a historic restructuring of the industry. Concentrated supply, a focus on profitability and returns, and vastly improved balance sheets have enabled airlines to out-earn their cost of capital and deliver solid, recurring free cash flows which have enabled shareholder-friendly capital allocation moves. This dynamic has put the industry in a much stronger position to weather a recession, or a fuel spike like the one we have experienced of late. A resurgence of capacity discipline and revenue vigor in the face of higher input costs should drive a rerating as pricing and margins inflect.