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The analysts, who also maintained Delta Air Lines (NYSE:DAL) at Buy, told investors in a note that growing domestic capacity should continue to pressure airlines’ unit revenue.
“This non-temporary burden is likely to result in margin pressure well into 2024 as the industry struggles to offset structural cost inflation. International, however, should perform more strongly thanks to a rationalised global fleet,” the analysts wrote.
Focusing on LUV, the analysts stated they downgraded the stock as they “think unit revenues will continue to face downward pressure, which is not expected by consensus.”
“Couple this with the company trading above through-cycle P/E, and we see downside risk,” wrote the analysts.
“We downgrade American to Neutral given it has the greatest exposure to the more competitive domestic market and the greatest near-term sensitivity to rising fuel prices, although we remain optimistic on its long-term delevering potential,” they added.
Meanwhile, United was upgraded as the firm has a preference for international. In addition, they have a more positive view on the impact of fewer narrow-body deliveries on both capex and growth over the coming years.
“We remain Buyers of Delta (target price $65), which we view as the highest quality play in the space,” the analysts concluded.
