re: AAL/SAVE
This "storm cloud" talk might explain some of the weakness in airline stocks lately. From Monday:
Airline Stocks Are Slipping Because 'Storm Clouds Are Starting to Form' -- Barrons.com
10:23 am ET July 29, 2019 (Dow Jones)
By Teresa Rivas
American Airlines Group, Alaska Air Group, Hawaiian Holdings, and Spirit Airlines stock are all lower in Monday morning trading, following downgrades from Macquarie, which warns that a market share push by Southwest Airlines could spell trouble for rivals.
The back story. Airline earnings have been a bit of a mixed bag this season, with aircraft groundings adding extra complexity to the companies' outlooks. Yet most of the stocks in the group haven't been able to quite keep up with the S&P 500's 2019 rally, which stood at almost 20% as of Friday's close.
What's new. On Monday, Macquarie analyst Susan Donofrio took a look at the airline industry following the second-quarter earnings season (only Hawaiian (ticker: HA), due to report Tuesday, has yet to release results), and warns that she sees the competitive environment getting choppier, offsetting some of the benefits of ongoing strong demand.
"We believe storm clouds are starting to form over the group as Southwest, unhappy with what management sees as lost market share in parts of their system, has recently made it clear that they plan on focusing and re-capturing what they lost," she writes. "As a result, we see a sloppier fall and early 2020 than previously expected as for the pricing environment for the group and are cooling on most airline stocks."
Looking ahead. Donofrio's rationale isn't surprising: Last week Southwest shares flip-flopped following earnings, as investors digested the implications of prolonged delays related to the grounded Boeing (BA) and the company's decision to pull out of Newark Liberty International airport. Southwest (LUV) is known for its savvy and driven management team, and while the Boeing situation is out of its control, it's quite feasible that the company would be aggressively looking to make up the difference elsewhere, and new routes like Hawaii have long been speculated about in terms of price cuts.
Given that she believes Southwest's push will dampen pricing power in the domestic market where it's most powerful, she downgraded American (AAL), Alaska (ALK), Hawaiian, and Spirit (SAVE) to Neutral from Outperform, with price targets of $34, $63, $29, and $47, respectively.
That said, she still has three Outperform ratings in the sector: Allegiant (ALGT), Delta Air Lines (DAL), and United Airlines Holdings (UAL). These "form the trifecta of being quality companies where we think that ongoing revenue initiatives (in the case of United and Delta) or minimal competitive route overlap (roughly 75% of Allegiant's routes face no competition) are likely to lead to stock price outperformance."
