Airlines
Expanding Survivor Bias:
Overweight CAL and DAL
We are becoming more positive on the riskier
airlines within our “Survivor Bias” call. We are
revising our estimates lower on higher oil and lower
revenue. However, we are not becoming more bearish
on the group at this point. In fact, we believe there is a
high probability that this is the final cut we make to ‘09
estimates and is therefore a reason to get incrementally
more positive on the space – particularly the likely
“Survivors.” Similar to the rationale behind our
early-March upgrades (see Survivorship Bias:
Upgrading HA, JBLU, and LUV 3/9/09), indiscriminate
selling of all airline equities has excessively punished
some higher quality carriers. Thus, we are evolving our
“Deep Preference for Low-Cost/Leisure Carriers” view
(see Moving to In-line: Prefer Low-Cost / Leisure Airlines
5/14/09) to include the marginal risk carriers (CAL and
DAL) among the “Survivor Stocks” which we now think
are discounting a sufficiently bearish outlook.
However, the risk of lower-for-longer demand keeps
us In-line on the industry and away from the
highest-risk airlines. We remain concerned that the
following issues are likely to weigh on the riskiest airline
equities: (1) a tempered rebound in 2H09 is likely to see
oil rise sooner and faster than airline revenues adding
risk to already seasonally weak fall/winter cash flows
and/or (2) an anemic 2010 rebound in demand could
trigger a liquidity squeeze at the highest-risk airlines.
However, at current valuations where the sentiment
overhang of weakness among the highest-risk airlines is
less of a concern for lower-risk airlines, incremental
negatives for the riskiest airlines are incremental
positives for the likely survivors of a bear-case scenario
creating a win-win situation for the “Survivor Stocks.”
Reorienting Ratings: Recent selling pressure
creates opportunity to add risk among “Survivors.”
We are upgrading higher-risk “Survivor” CAL to OW and
initiating DAL at OW (see Synergies + Survivor Bias;
Initiating Overweight 7/2/09). We are downgrading HA
to EW and LUV to UW as relative valuation has become
less compelling (see pages 3-4).