Morgan Stanley downgrades airline stocks because too much added capacity will hurt profitability

File photo: American Airlines passenger planes at Miami International Airport
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Morgan Stanley lowered its rating on American Airlines shares to equal weight from overweight, saying the company's earnings results will come in below expectations this year.

"American holds below-average margins, industry-leading leverage, and lackluster cash flows creating outsized cyclical leverage and motivating our downgrade," analyst Rajeev Lalwani wrote in a note to clients Wednesday.

In addition, the analyst downgraded his view on the airlines industry to in line from attractive as "supply is rising, but margins seem more likely to move in the opposite direction."