Morgan Stanley Leaps Bullishly Into Virus-Racked U.S. Airlines

Morgan Stanley is bullish on U.S. airline stocks, initiating coverage on the sector with an “attractive view” and overweight ratings forSouthwest Airlines Co.,JetBlue Airways Corp. andDelta Air Lines Inc.

While recovery from the coronavirus pandemic will be bumpy and there are potential pitfalls ahead, passengers are likely to return once a vaccine is available and demand could reach pre-Covid levels by late 2021, about two years ahead of consensus forecasts, analysts including Ravi Shanker wrote in a report. Competitive pressure will also ease with fewer domestic players.

“Airlines with high domestic leisure exposure, medium length of haul, strong customer loyalty and/or attractive fares will see demand come back first,” they wrote. The most defensive will be carriers with high margins, relatively strong balance sheets and management teams focusing on passenger revenue per available seat mile over capacity growth.

“Our stock preference reflects this barbell approach and is biased toward low-cost carriers and ultra-low cost carriers versus legacies (with the exception of Delta, which is arguably the highest-quality legacy airline franchise, and also checks most of those boxes),” Shanker and his colleagues said in the report dated Sept. 8.

More support is likely to materialize after the Cares Act expires at the end of September, pushing deep cost cuts down the road, while jet fuel prices should stay relatively low and steady over the next one or two years, barring any sharp moves in crude, according to the report.

The Coronavirus Aid, Relief and Economic Security Act, or Cares Act, provides economic assistance for American workers and their families. It was signed into law in March in response to Covid-19.

Morgan Stanley recommendations

“Near-term choppiness and vast operating and financial differences between Airlines lead us to pick Quality over High-Beta stocks, for now.”

  • Southwest: Overweight, price target $54 (Friday close $39.39)
  • JetBlue: Overweight, price target $16 ($12.13)
  • Delta: Overweight, price target $50 ($31.77)
  • Allegiant Travel Co.: Overweight, price target $175 ($133.65)
  • Alaska Air Group Inc.: Equal-weight, price target $46 ($40.82)
  • United Airlines: Underweight, price target $37 ($38.21)

Risks to the “attractive” industry view include a slower-than-expected recovery in air traffic if the pandemic intensifies, which will severely stress balance sheets and may result in a race to the bottom on pricing, the New York-based bank said.

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