Airlines
Fundamentals On The Mend, Profits In The Distance;
Equity And Credit Ratings Revised
Airline Equity
Jamie BakerAC
(1-212) 622-6713
jamie.baker@jpmorgan.com
Scott Tan, CFA
(1-212) 622-5541
scott.b.tan@jpmorgan.com
Joseph Abboud
(1-212) 622-7059
joseph.g.abboud@jpmorgan.com
Airline/Aircraft Credit
Mark Streeter, CFAAC
(1-212) 834-5086
mark.streeter@jpmorgan.com
J.P. Morgan Securities Inc.
Equity Ratings and Price Targets
Mkt Cap Rating Price Target
Company Symbol ($ mn) Price($) Cur Prev Cur Prev
AirTran Holdings, Inc. AAI 926.27 6.61 N OW 11.00 9.00
AMR Corp. AMR 1,680.00 6.00 OW n/c 12.00 10.50
Alaska Air Group, Inc. ALK 938.56 25.65 OW n/c 46.50 31.00
Continental Airlines, Inc. CAL 1,700.04 13.71 OW n/c 24.50 13.00
Delta Air Lines, Inc. DAL 6,061.91 7.33 OW n/c 18.00 13.00
JetBlue Airways Corp. JBLU 1,958.97 6.06 N OW 9.50 7.00
Southwest Airlines Co. LUV 6,528.21 8.81 N n/c 10.50 7.50
UAL Corp. UAUA 935.90 6.45 OW UW 13.00 –
US Airways Group, Inc. LCC 443.17 3.58 N UW 6.50 –
Source: Company data, Reuters, J.P. Morgan estimates. n/c = no change. All prices as at 09 Sep 09.
See page 49 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
For the first time in a long time, close-in estimates look about right, while 2010
consensus could stand to improve, in our view. More importantly, assuming stable
demand and fuel, we now expect winter to pass with nary a bankruptcy in sight,
necessitating equity ratings upgrades for LCC and UAUA, downgrades for AAI
and JBLU, as well as an overall improvement in both our sentiment and
conviction.
• Demand weak, but not as bad as feared . . . July and August revenue trends
were modestly ahead of initial forecast. While numerous leading indicators as
well as J.P. Morgan's GDP forecast portend imminent economic recovery, we'd
rather assume air travel trends bounce along until about January, at which time
we do assume gradual improvement begins (2010 revenue +5.5% following
2009’s 17% decline).
• . . . suggesting everyone makes it, this time. Our updated liquidity models,
which now focus on both unrestricted cash and total cash (the latter most
favored by LCC management), suggest Legacy covenants are cleared and
liquidity for AMR, LCC, and UAUA proves adequate (not to be confused with
good). Also, we've finally incorporated our BOTBS cash flow modeling into our
dynamic equity models, which are yours for the asking.
• Close-in estimates look about right; some airlines might actually guide up.
For the first time in roughly a year, we don't differ materially from near-term
consensus. Better yet, demand may have slightly exceeded initial management
forecasts, while weather and fuel appear to have cooperated. Delta is among the
more likely to slightly boost existing margin guidance, as well as potentially
JetBlue, in our view. We’re not looking for huge improvements, though the
passing of seemingly perpetual downward guidance may be greeted
enthusiastically by the market.
• 2010 looking good, not great. $1.90/gallon spot fuel, capacity -2%, ex-fuel
CASM +1.5%, and total revenue +5.5% form the basis of our 2010 industry
forecast. Hopefully our demand forecast turns out to be conservative, though
fuel could easily prove disruptive. Broadly speaking, we anticipate 700 bps of
EBIT improvement for Legacies, less than half that for Discounters. We look for
aggregate profits similar to 2006. Recall that even at its nadir the XAL was 78%
higher in 2006 than today, and at one point it was 147% higher.