JPMorgan Says Buy American, Sell United In Airline Ratings Shake-Up

In a research note to investors, JPMorgan analyst Jamie Baker upgraded American Airlines (AAL) to Overweight, while cutting United Continental (UAL) and Spirit Airlines (SAVE) to Underweight, and Alaska Air (ALK) and JetBlue (JBLU) to Neutral following quarterly results from the group.

BUY AMERICAN AIRLINES: JPMorgan’s Baker upgraded American Airlines to Overweight from Neutral and raised his price target on the shares to $65 from $53, citing a newfound momentum, peer-leading valuation and expected Revenue Per Available Seat Mile, or RASM, outperformance. The analyst told investors that the company is in the midst of several revenue-accretive initiatives including an expansion of Basic Economy and higher paid load factors in the domestic premium cabin. Baker believes these initiatives will drive higher returns and stronger unit revenue, with guidance for the fourth quarter suggesting that American is benefiting from prudent revenue management and making early progress on its goals. Following what he views as an overdone correction in the shares after third quarter earnings, the analyst said he views the risk-to-reward in the stock as attractive and recommends investors take advantage of any continued weakness in the share price.

SELL UNITED, SPIRIT: Meanwhile, JPMorgan’s Baker downgraded United Continental to Underweight from Neutral and lowered his price target on the shares to $60 from $68, noting that its turnaround appears grounded, and investor patience is wearing thin despite RASM guidance that mostly emerged at the better end of expectations. The analyst told investors that he is “increasingly concerned” about the lack of revenue vigor that United has displayed in light of stepped-up competition. Additionally, Baker viewed the company’s third quarter earnings call as “uniquely weak” since management was not able to respond to basic investor inquiries as to why its turnaround initiatives are not being reflected in its financial results. The analyst added that he no longer views United’s plans to close the margin gap with Delta (DAL) as credible in their current iteration, and management would need to articulate a clearer and more achievable set of goals with measurable benchmarks for success before he would get comfortable with the risk-to-reward on the shares. Baker also downgraded Spirit Airlines to Underweight from Neutral, while raising his price target on the shares to $39 from $37. The analyst argued that he views the stock’s risk/reward as unfavorable relative to peers, while the company’s lack of willingness to fine tune its strategy in light of its competitor responses gives him reason for caution.