Airlines: Even More Reasons to Be Bullish?

With airlines like United Continental (UAL), Delta Air Lines (DAL) and American Airlines (AAL) up more than 20% so far this year, it’s fair to ask: Can investors get any more bullish on the share?

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The answer: Probably not. Morgan Stanley’s John Godyn and team explain

Last month, we saw the highest Higher Less Lower spread ever, at 89%, with 91% of investors responding bullishly while only 2% were bearish across 44 responses – a new all-time record which we called Maximum(est) Bullish. This month, we've reverted to 'normal' Maximum Bullish levels with 87% of investors voting higher and 7% voting
lower for a net spread of 80%. Despite the deceleration, as they typically have been in the past, such levels still indicate continued share price momentum…

…we recommend the super-majors American Airlines, Delta Air Lines and United Continental given their significant leverage to the cycle and among the low-cost carriers we prefer Spirit Airlines (SAVE) – our Top Airline Growth Pick for 2014.

It’s not hard to see why. Consider Delta, which today said that one measure of revenue not only grew but should continue to do so. UBS analysts Darryl Genovesi and Raymond Wong find it hard to contain their excitement:

With May PRASM coming through at top end of 6-7% guidance range and fuel tracking below prior guidance, we estimate that Delta is now implying Q2 EPS closer to $1.10 than consensus of $1.01 and our prior estimate of $1.03.

Genovesi and Wong see Delta hitting $48 a share within 12 months.

Deutsche Bank’s Michael Linenberg and team looked at changes in market shares at the fifty largest airports in the U.S. and see signs of the airline’s focus on running better businesses:

The airports that experienced the largest change in share by a major operator were either: 1) on the endangered hub list (e.g. Cincinnati, Memphis and soon-to-be Cleveland); 2) targeted by a low fare airline (e.g. JetBlue (JBLU) in Boston and Fort Lauderdale, Southwest (LUV) in Baltimore and Denver, among others); or 3) Washington Reagan National and New York LaGuardia which reflected the 2012 slot/gate swap between Delta and US Airways. We are of the view that the majority of these actions were/are margin accretive as US airlines focus on redeploying their assets to airports where they can maximize returns.

Shares of Delta Air Lines have ticked up 0.1% to $40.81 at 11:21 a.m. today, while American Airlines has edged up 0.1% to $41.24, United Continental has risen 0.4% to $46.88, Southwest Airlines has advanced 0.7% to $26.90 and JetBlue Airways has gained 0.8% to $9.90. Spirit Airlines has dropped 0.4% to $59.56.