Finally Time to Buy Airline Stocks: Neidl
The recent declines in the price of oil make airline stocks such as Delta and Continental attractive at current "fire-sale" prices, Ray Neidl, airline analyst from Calyon, told CNBC.
Calyon has raised its rating on the major carriers to "add" from "neutral" in the wake of the slumping crude price. New York Light, Sweet Crude has fallen more than 50 percent from its July peak above $147 a barrel.
The airline sector tumbled as oil prices rose in the first half of the year, but failed to recover along with oil's ease due to the increasingly depressed economic outlook.
"It is difficult to catch the bottom, but we believe we are near it regarding airline stock prices," Neidl said in a research note.
The major US airlines won't "go over the cliff into bankruptcy," Neidl added.
Alaska Air, American Airlines parent AMR, Continental, Delta Northwest , UAL and US Airways were all on the Calyon's "add" list.
Investors should play the sector only with a long-term time horizon, as the high level of market volatility could cause stocks to tumble further in the near term, according to Neidl.
Further weakness in stock prices in the coming weeks should be seen as buying opportunities, according to Calyon's research note.
The airline industry has reacted well to the worsening economic conditions by making aggressive cuts to capacity and increasing liquidity, Neidl said.
"This is the first time I've ever seen the US airline industry prepared for a major economic downturn," Neidl told "European Closing Bell."
(Watch the full CNBC interview with Ray Neidl above).
European airlines are not as well positioned to benefit from oil's decline because many have taken out expensive hedges against price fluctuations, Yan Derocles, aerospace and airline analyst from Oddo Securities, told CNBC.com.
The recent strength of the dollar versus the euro has also lessened the positive impact of easing oil, Derocles said.
Hedging costs have impacted US airlines to a certain extent because they tend to buy around 25 percent of their fuel needs in advance, Neidl told CNBC. Southwest has been one of the worst affected amongst the US carriers, because it hedges around 85 percent of fuel demand, Neidl said.
On the 'Add' List
Alaska Air has a strong balance sheet and a good management team that understands its niche, according to Neidl. They have also been aggressive in cutting costs and standardizing their fleet, he said. Calyon's price target for the carrier is $38 a share, its closing price on Tuesday was just shy of $22.
AMR has a good worldwide route network and is moving to modernize its fleet, Neidl said. But leverage is high, he warned. Calyon's price target is $18 a share, Tuesday's close was $9.09.
Continental's New York Liberty Airport stands the company in good stead because it's one of the strong assets in the airline business, according to Neidl. Continental shares closed at $16.21 on Tuesday, but Calyon is targeting $32.
The recently approved merger between Delta and Northwest will help boost revenue and cut costs when the tie goes ahead, Neidl said. Delta's target price is $12, while Northwest's is $15. Both well above current valuations.
UAL has been aggressive in cutting capacity and rationalizing its routes, Neidl said. It will also benefit from its strategic hubs. Calyon's target is $22 and Tuesday's close was $9.94.
US Airways has improved its liquidity and reduced its bankruptcy risk, Neidl said. The Calyon target is $17. Tuesday's close was $8.56.
Low-cost carriers also look set to benefit from the fuel-price declines, but their growth models are still in "stall mode," Neidl said. Some low-cost players will fare better than others, he said.
AirTran was on Calyon's "add" list, but Southwest was downgraded to "reduce."
In Europe, Ryanair looks set to gain market share at the start of next year, Derocles told CNBC.com. A lack of oil hedging and flexibility will help the Irish, low-cost carrier, he said.
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