The U.S. airline sector has undergone key changes since in the past decade. Airlines had a hard time remaining profitable throughout the whims of a business cycle, and new airline carrier entrants kept up pricing pressures. But that was then. Now that airlines have consolidated into a few key carriers, and now that they get to dictate prices, fees and whatever other conditions they want, airlines are major profit centers. This has prompted Credit Suisse to take an Overweight rating in the sector under new coverage.
Credit Suisse assigned Outperform ratings to the following air carriers: American Airlines, Delta Air Lines and United Continental.
Delta Air Lines Inc. (NYSE: DAL) was started as Outperform with a $56 price target. Credit Suisse says Delta has been at the forefront of the U.S. airline renaissance. It is considered a key holding for airline investors because it offers lower debt levels, a fully integrated merger and an established shareholder return program. Delta also boasts a leading position in corporate market share that yields a 13% domestic revenue premium to the industry. The shares have recently traded at $39.09, with a consensus price target of 50.53 and a 52-week trading range of $21.97 to $42.66.
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American Airlines Group Inc. (NASDAQ: AAL) was started as Outperform with a $52 price target. Credit Suisse expects American to take an approach to shareholder returns similar to Delta, as well as anticipating a quick pace on buybacks with additional authorizations and a dividend raise in 2015. Despite American being 50% up on the year, recent weakness in the share price offers longer-term investors an attractive entry point. The shares recently traded at $38.07, against a consensus price target of $52.41. The 52-week range is $16.84 to $44.88.
United Continental Holdings Inc. (NYSE: UAL) was started at Outperform with a price target at $68. A catalyst that will drive earnings and valuations up is the accelerating cost reductions and easing wage inflation that likely will permit flat to down ex-fuel unit cost growth. United is expected to exceed its buyback expectations for shareholder returns. The earlier-than-expected buyback underpins management’s confidence in its earnings trajectory. A strong third quarter is expected to build on a second quarter that reassured that the post-merger underperformance was coming to a close. The shares recently traded at $51.98, with a consensus price target of $54.16. Its 52-week range is $29.11 to $52.45. We would point out that just on August 9 this was featured as America’s worst airline.
Southwest Airlines Co. (NYSE: LUV) was started as Neutral with a $32 price target (versus $33 recently), with Credit Suisse considering it to be already fully valued. One issue may be the ongoing time and performance issues.
JetBlue Airways Corp. (NASDAQ: JBLU) was started as Underperform with an $11 price target (versus $12.20 recently).
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