In their first-quarter earnings reports, airlines offered strong forecasts for the rest of the year. Yet their shares have fallen recently, with the U.S. Global Jets ETF (JETS) – Get U.S. Global Jets ETF Report, sliding 13% since April 21.
So what gives?
“Last week, Delta Air (DAL) – Get Delta Air Lines Inc. Report, American Airlines (AAL) – Get American Airlines Group Inc. Report, Alaska Air (ALK) – Get Alaska Air Group Inc. Report and Hawaiian Airlines (HA) – Get Hawaiian Holdings Inc. Report all updated second-quarter guidance and reported … demand and pricing strength,” Bank of America analysts wrote in a commentary.
“DAL cited strength across its consumer, international and corporate channels that it sees continuing into the third quarter,” the analysts noted.
“As of now, the industry isn’t seeing any signs of demand slowdown or price resistance (DAL mentioned summer prices could be up 25% to 30%),” they said.
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“But the market is clearly concerned given recent share price underperformance. Peak summer travel seems very strong, but there is uncertainty among investors as to how the fall progresses.”
Still, BofA analysts remain bullish. “We continue to believe airlines are set up for positive revisions this summer, and we raise our estimates for the latest second-quarter guidance.”
They rate the following stocks as buys.
Delta
“It doesn’t expect to add capacity from peak levels this summer in order to create a better customer experience …, as the airline stated it needs eight to 12 months before pilot training throughput stabilizes,” the analysts said. “At that point, we expect growth to resume.” Also, “a premium multiple is reasonable for Delta given its relative balance sheet strength versus American and United Airlines (UAL) – Get United Airlines Holdings Inc. Report, which likely allows it to generate free cash flow sooner,” the analysts said. “Further, Delta has more capacity discipline…