Airline stocks soared higher today as Treasury Secretary Steven Mnuchin said the White House would begin responding to their applications for government aid as soon as Friday.
Alaska Air (NYSE: ALK) ended Thursday 8.5% higher, American Airlines (NASDAQ: AAL) gained 10.4%, Delta Air Lines (NYSE: DAL) rose 5%, JetBlue (NASDAQ: JBLU) added 5.2%, Southwest Airlines (NYSE: LUV) gained 6.3%, Spirit Airlines (NYSE: SAVE) jumped 12.5%, and United Airlines (NASDAQ: UAL) soared 14.5% higher.
But even as airline stock climb higher, JPMorgan analyst Jaime Baker advised this week that investors should stick with high-quality names like Delta, United, and Alaska Air, and avoid those stocks with vulnerable balance sheets and operations, particularly American and Spirit.
Baker issued several ratings in the sector in a note this week, downgrading American, Spirit, JetBlue, and Southwest, and upgrading Alaska to Overweight, while keeping Overweight ratings on both Delta and United.
The analyst wrote in the note that he initially expected industry revenue in 2021 to hover around 2019 levels, but is now forecasting 2021 revenue to come in 25% below 2019 levels as the coronavirus pandemic continues to ground flights.
“We are growing increasingly convinced that industry recovery to 2019 levels of output will be a multiyear affair, resulting in the material shedding of aircraft and head count along the way,” Baker wrote. “Managements here and abroad appear to be targeting much smaller footprints than we first factored into our modeling.”
Baker said there’s value in Delta and United given that they should benefit from corporate travel ramping back up quicker than leisure travel.
Delta, according to Baker, has the highest margins of the big-name carriers heading into the coronavirus crisis, and boasts one of the strongest balance sheets in the industry. Baker also noted that Delta could gain market share from weaker carriers that have had to cut back on schedules and flight capacity.
While United isn’t as profitable, Baker said that it’s a solid choice as the airline is making progress on turnaround efforts and should weather the crisis with enough liquidity.
Baker concluded that, of the major carriers, American looks like the most vulnerable of the bunch. The analyst downgraded the stock from Overweight to Underweight writing, “our view on aggregate bankruptcy risk… has no doubt evolved in recent weeks” as the need for material downsizing has risen.
“In our opinion, the margin for error for American management to navigate this crisis outside of the courts is growing uncomfortably thin (and dependent on factors outside of management control, i.e. duration of the virus, traffic recovery cadence, further government support) that we really don’t think we’re left with a choice but to downgrade our credit opinion on American as well, to underweight (from our prior neutral on the credit side,” Baker wrote.