July 06–U.S. airline stocks tumbled again Wednesday after a Wall Street analyst downgraded ratings on American Airlines and on United Airlines.
Credit Suisse analyst Julie Yates cited negative trends including weak European travel demand, expensive labor costs, and disappointing revenue per seat mile flown, a key industry measure.
Depreciation of foreign currencies against the U.S. dollar hampered inbound international travel, even before Britain voted to leave the European Union, the U.S. Travel Association said in a recent report.
The group projected “a similarly dour outlook for international travel” through the end of the year. By contrast, American leisure travelers who account for 60 percent of U.S. travel spending “will likely continue their role as engines of growth” in 2016, the travel industry group said.
“Corporate demand trends aren’t good and there is incremental risk of further {foreign exhange} headwinds and lower trans-Atlantic yields post Brexit,” Yates said in a client note.
She downgraded United to neutral from outperform, and cut her rating on American to underperform from outperform.
“Since January, we are less optimistic overall on the industry’s ability to recapture pricing in a rising fuel environment, particularly outside the U.S.,” Yates said. “Capacity growth continues to outpace GDP in all regions and the industry’s willingness to meaningfully trim growth, with oil still in a historically inexpensive range of $50 a barrel, is low.”
Yates affirmed her outperform ratings on Delta which has an “investment grade” balance sheet and “the most sustainable” cash flow and on Southwest and Spirit airlines, whose routes are mainly domestic and not international.
As U.S. carriers begin reporting second-quarter earnings next week, the outlook for revenue growth improvement in third-quarter will “underwhelm,” Yates wrote. “We think investors need more, and will want to hear capacity is being cut to drive improvement in unit revenues.”
Shares of American, which operates 70 percent of flights at Philadelphia International Airport, were down 4.36 percent, while United was down 3.48 percent.
Delta shares were down 1.71 percent, Spirit was down 2.10 percent, and Southwest Airlines was down 1.17 percent in afternoon trading.
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US airline stocks drop after downgrade
