By Tomi Kilgore, MarketWatch
JPMorgan worries about how investors will react to reduced flight schedules in the fall; JetBlue and United downgraded on valuation concerns
Airline stocks took a dive Wednesday, after JPMorgan analyst Jamie Baker laid out four reasons the recent price surges, and increases in flight schedules, can't continue at the current pace for much longer.
The U.S. Global Jets exchange-traded fund(JETS) tumbled 7.5%, with 32 of 37 equity components losing ground. The Jets ETF had dropped 6.8% on Tuesday, to snap a six-day win streak in which the ETF soared 45.4%.
Among the ETF's most-active U.S.-based components, shares of American Airlines Group Inc.(AAL) dropped 8.3%, United Airlines Holdings Inc.(UAL) slid 11.0%, Delta Air Lines Inc.(DAL) declined 7.4%, Spirit Airlines Inc.(SAVE) sank 14.5%, Southwest Airlines Co.(LUV) was down 2.3% and JetBlue Airways Corp.(JBLU) slumped 11.1%.
Airline stocks had been soaring, until pulling back on Tuesday, as part of broad strength in travel-related sectors, following surprisingly upbeat May employment numbers (), signs that demand for travel ( ) keeps improving and as all 50 states have started lifting restrictions ( ) put in place to slow the spread of the COVID-19 virus.
Baker downgraded JetBlue to underweight from neutral on Wednesday, and United to neutral from overweight, as those carrier's stocks had recently "overshot" his revised price targets. He now only has overweight ratings on Alaska Air Group Inc.(ALK) and Delta. He's neutral on United and Southwest, and has underweight ratings on American, JetBlue and Spirit.
"We do not believe the current pace of equity ascent can be potentially maintained for much longer, for four reasons," Baker wrote in a research note to clients. Here are the reasons:
1) The steady improvement seen in traveler data from the Transportation Security Administration is "likely to moderate" this fall. Baker doesn't believe corporate travel demand in the fall will adequately replace all the pent-up leisure travel demand seen over the summer.
The daily average number of travelers going through TSA checkpoints for the weeks ending Sundays have improved every week -- it was up to 361,610 in the latest week -- since bottoming at 97,393 during the week ended April 20, according to a MarketWatch analysis of TSA data.
While the number of travelers fell to 338,382 on Tuesday, from an 11-week high of 441,255 on Sunday, it was still the highest number of travelers for a Tuesday since March 17.
2) Valuation hasn't been much of a concern of late, but given the recent surge in the sector, it is beginning to look stretched for some.
For JetBlue, the stock had shot up 71.5% in a month to close Monday at $15.59, the high close since Feb. 28, before pulling back to $12.45 on Tuesday. That was still 13% above Baker's new price target of $11, which was raised from $9.
United's stock had soared 91.5% in a month to a 3-month closing high of $48.69 on Monday, before losing 8.3% on Tuesday to $44.64. That was 3.8% above Baker's new price target of $43, down from $45.
"Something has to give, in our view, and unless our 2021 forecasts are meaningfully insufficient or an effective vaccine is imminent, we fear what might ultimately give is the recent across-the-board surge in equities," Baker wrote.
3) Treasury loan decisions are believed to be imminent, and may prove the last easily identifiable near-term positive catalysts. Those announcements could potentially be followed by stock offering announcements, which would dilute current shareholders.
Many airlines have already announced the receipt of the first and second tranches of the U.S. Department of Treasury's Payroll Support Program, as part of the Coronavirus Air, Relief and Economic Security (CARES) Act.
See related: U.S. taxpayers set to be major investors in the struggling airline industry ().
4) "The autumn of discontent is gradually approaching," Baker said, as airlines could start trimming schedules in the fall once the government's payroll support program expires.
Since the increase in flight schedules helped spark the recent sharp stock rallies, Baker worries about how investors will react if companies start trimming schedules as leisure travel demand decreases once they become responsible for labor costs again.
Also read: American Airlines stock rockets to record gain, on signs that the worst is over for airlines ().
"We are concerned that autumnal schedules will be culled relative to summer levels by more than customary once labor burdens shift back to the airlines and involuntary furloughs commence," Baker wrote. "Whether this potentially spooks the market is unclear at this early stage, but given the euphoria expressed over higher summer capacity, we believe it's prudent to ponder."
The Jets ETF has lost 12.8% over the past three months. The Dow Jones Transportation Average , of which 6 of its 20 components are airlines, has run up 12.4% over the same time, while the Dow Jones Industrial Average has advanced 7.9%.
-Tomi Kilgore; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
June 10, 2020 16:10 ET (20:10 GMT)
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