Airline Analysts Turn Cautious

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Two airline analysts turned cautious Wednesday, citing higher oil prices and tepid demand.

“The combination of geopolitical concerns and cautious economic optimism has lifted oil prices just as sluggish economic trends are catching up to the airlines,” wrote JPMorgan analyst Jamie Baker, in a report in which he reduced price targets for most carriers, even though he continues to expect that 2012 and 2013 will provide the industry with profits for the third and fourth consecutive years.

Dahlman Rose analyst Helane Becker wrote Wednesday that her view of the industry has diminished to cautious from optimistic.

“We believe the shares priced in a bottom for jet fuel costs,” she wrote. “We believe load factors peaked and passenger revenue per available seat mile comparisons become more difficult as the year goes on. We advise investors to consider taking profits on strength.”

Year-to-date as of Tuesday’s close, the Amex Airline Index is up 11 percent, while the S&P 500 is up 7.7 percent. US Airways Group, up 120 percent, leads airline shares. Spirit Airlines has gained 37 percent. Delta Air Lines is up 17 percent. The other major carriers show gains in the single digits, although United Continental is up just 1 percent.

Meanwhile, PRASM growth is slowing. Industry PRASM (passenger revenue per available seat mile) rose 8.2 percent in 2011 and is up 7.3 percent year-to-date, said Becker, who anticipates it will slow further. Managements are guiding towards 2 percent to 3 percent growth in the third quarter.

United, the world’s largest airline, is an area of concern, following a troubled second quarter.

“United’s rising (costs), deteriorating margins, and continued labor discord are of obvious, growing worry,” Baker wrote. “Our own concern is that if management fails to more aggressively seize the controls, then UAL could — over time — step into the uninspiring role AMR once occupied as the industry laggard.”

Although he has reduced expectations and price target for UAL, Baker continues to rate the carrier overweight. In fact, Baker remains optimistic about the industry due to “cost harmonization, return-focused managements, continued supply discipline and potential consolidation.”

“Our phones are still ringing and interest in the industry’s renaissance is as high as ever,” he wrote.

Baker reduced estimates and price targets because he expects industry operating margins, which improved close to two points in the first half of the year, to around half a point.

Baker projected year-end share prices of $17.50 for Delta, his top pick, which closed Tuesday at $9.65; $19 for US Airways, which closed at $11.46; $38 for United, which closed at $18.89; $10 for JetBlue Airways, which closed at $5.51; $39.50 for Alaska Air Group, which closed at $34.85, and $12.50 for Southwest Airlines, which closed at $9.19.


Wolfe Trahan analyst Hunter Keay has a $27 price target for United, and CRT Capital Group analyst Mike Derchin wrote Wednesday that he remains positive on the industry, particularly Delta and United, despite all the concerns.

He said the industry generated an estimated $2 billion in second-quarter profits, despite rising fuel costs.

“Industry fundamentals are continuing to improve, yet expectations are very low,” Derchin wrote. “Demand is solid. Fares/yields are up. Load factors are at record levels. Ancillary fees are growing. Capacity discipline remains in force.”

In the current quarter, Derchin estimatesd Delta PRASM will rise 4 percent, industry PRASM will rise 2 percent, and United PRASM will be flat.

—By TheStreet.com’s Ted Reed

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