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Major airlines survived what was probably the worst quarter in modern aviation history. Carriers lost billions of dollars, as expected, and the issue that emerged is that their recovery stalled in July when Covid-19 cases increased and states imposed quarantine measures.
Most airlines are now cutting flights scheduled for the rest of the summer and early fall, ducking down to save cash. Analysts are still adjusting their price targets and estimates for the industry. But so far, there don’t seem to be many rating changes or reversals.
Opinions simply remain on the entire airline map.
JP Morgan analyst Jamie Baker maintained his underweight rating on American Airlines Group (ticker: AAL). An analysis of the sum of the parts, including the value of American’s mileage loyalty program, brand, slot machines, and other assets would imply a value of $ 70 billion, more than 10 times the stock market capitalization of $ 6 billion from the operator. But the value of American’s shares is “trapped” by debt and other liabilities, which are expected to exceed $ 40 billion by the end of 2020, Baker writes.
American’s income base will not return to 2019 levels for a few more years; It is expected to be 74% of its 2019 level in 2021. And without an exit from its debt (except for a bankruptcy reorganization), Baker writes that “it is a challenge for us to imagine having a more optimistic outlook,” even if the the stock drops significantly from here.
Baker also sees more risk than reward in Spirit Airlines (SAVE) shares, calling it underweight. However, it raised its target price on Southwest Airlines (SAVE) to $ 41 from $ 40, maintaining a Neutral rating. And she’s overweight at Alaska Air Group (ALK), raising her price target to $ 55 from $ 54.
Citi’s Stephen Trent rates Southwest at Neutral with a goal of $ 38, and argues that American’s shares have more downsides, rating it at Sell with a goal of $ 14. He is positive at Spirit and writes that the carrier “looks well positioned to capitalize on the gradual rebound in visits from friends and family (VFR) and tourism travel. ” However, he lowered his price target from $ 22 to $ 21.
Raymond James analyst Savanthi Syth doesn’t see much of a rise in the United States, calling it Underperform. She maintained the equivalent of neutral ratings on United Airlines (UAL) and Spirit, and said she prefers Delta Air Lines (DAL) among legacy airlines. It also sees more gains for Southwest, calling it a strong buy with a target price of $ 45.
Cowen’s Helane Becker slashed her Southwest target price to $ 39 from $ 40, but kept her top performance rating. “Southwest has an industry-leading balance sheet that gives us little concern that they may weather the storm,” he writes. “The company remains a relatively good place to hide and also participate in a recovery, given its willingness to leave capacity on the market longer than others.”
Becker is also bullish on Spirit, keeping a target of $ 20, and sees gains for American, holding a target of $ 15. “American’s balance sheet is debt-ridden, but it gives the company a solid liquidity base to manage. the pandemic, “he writes.
UBS analyst Myles Walton is not impressed with American, writing that the company “has no more room to cover costs.” It maintained a Sell target of $ 9. It also considers United’s shares to be relatively weak, reducing its profit estimate for 2020 by 20% and raising its loss estimate for 2021 and 2022. It maintained a Neutral rating and a price target. $ 25, down 24% from recent prices of around $ 33.
He is more optimistic about Southwest, reiterates a target price of $ 41, and writes that the “overall picture of the company’s cash flow has improved.”
Overall, expectations are being set for a long period of lower earnings. Air traffic will not return to 2019 levels until the pandemic subsides, halted by more effective treatments, widespread distribution of a vaccine, or global herd immunity.
“Our best guess is that demand, as measured by revenue, will recover over time to drop approximately 50% and then stabilize at that level until a vaccine is widely distributed,” United told investors in a call for earnings this week.
The airlines appear to have raised enough capital, including grants and Treasury loans under the Care Act, to survive. Cash consumption rates vary, and are increasing in some cases, but none of the major operators appears to be at imminent risk of insolvency. All have also cut operating costs and delayed capital spending plans for new aircraft.
And most carriers plan to cut labor costs through permits, purchase packages, or layoffs this fall, cutting thousands of employees when payroll support expires under the Care Act. (Southwest is an exception, saying it would not need to cut jobs since 17,000 workers have already taken purchases or retirement packages.)
The result is that the next few months will be turbulent for the industry and stocks.
Write to Daren Fonda at [email protected]
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