Airlines stocks are facing turbulence today after Merrill Lynch downgraded JetBlue (JBLU) to Underperform from Neutral. Delta Air Lines (DAL) American Airlines (AAL), United Continental (UAL) and Southwest Airlines (LUV) have all dropped today.
AP Merrill Lynch cited overconfidence about the possibility for big changes at JetBlue as the reason for its downgrade. Still, just the mention of change at JetBlue–the possibility of a bag fee–has helped it gained 31% during the last six months. Stifel’s Joseph DeNardi considers what a similar change could mean for Southwest Airlines:
The pushback so far on increasing our [Southwest Airlines] target price to a street-high $55 has been that (1) it is already priced into the stock and reflected in Southwest's P/E multiple premium, (2) there are not any catalysts in the next 18 months for Southwest to make a meaningful change to its fee strategy, and (3) Southwest can't change its strategy because of how important the free bags policy is to its brand. If Southwest's bag-fee call option is priced into the stock, then JetBlue's should have been also and it wasn't based on the performance of that stock since management began talking about a first bag fee next year. If JetBlue can successfully implement a first bag fee with no meaningfully negative impact to its brand or customer demand, then Southwest may feel more comfortable doing the same.
DeNardi also said he continues to favor Delta Air Lines over United Continental, despite the fact that United Continental has outperformed this year:
While Delta's stock has underperformed United's since 2Q EPS, this is clearly a function of relative performance over the past few years and United making up ground it had lost. We suspect that concerns over international capacity are likely to remain an overhang for the network carriers over the next few quarters as investors wait to see to what extent efforts by Delta, United, and American to collectively manage down capacity with their international partners alleviate some of the pressure. But we believe Delta's analyst day later this year will be a good data point for the company and reinforce what continue to be very positive bigger picture themes – ramping cash generation, a strong pricing environment domestically, the continued benefits of industry consolidation, and further progress on closing the multiple gap between airlines and the industrials group.
Shares of JetBlue have dropped 6.8% to $11.36 at 1:37 p.m. today, while Delta Air Lines has fallen 0.5% to $39.47, United Continental has slipped 1.8% to $49.51 and American Airlines is off 1.4% at $37.12. Southwest Airlines has gained 0.9% to $34.18.
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