This week I was happy to see an old name reappear at the top of a handful of airline research reports. That name? Dan McKenzie.
Most recently Dan was the airline analyst for Credit Suisse. Dan has now resurfaced as the airline analyst for Next Generation Equity Research.
This week Dan initiated coverage on JetBlue, Southwest and AirTran.
Dan initiated coverage of JetBlue with a “buy” rating and a $6 target price.
In his note, Dan commented,
Our 2009 profit forecast is largely in line with a consensus outlook, however, our modestly better 2010 outlook results from jetBlue’s new revenue management system, legacy carriers that continue to exit jetBlue’s largest markets, and revenues that begin to finally trickle in from a Lufthansa code share (which is not yet announced but a logical assumption in our view given the close relationship between the two carriers).
Despite its smaller size and five years of reported losses or weak profits, our outlook is on balance positive based on a number of unique findings in our proprietary capacity study.
We found the industry cutting head to head flying by 15% in jetBlue’s routes, leaving jetBlue with the industry’s best competitive dynamic. In particular, we found AMR cutting as much as of 50% of its flying in jetBlue’s top 50 markets (airport to airport), while other carriers are cutting 15-30%.
At Fort Lauderdale, a focus city, we found both AMR and US Airways shrinking 47% and 14% respectively (as jetBlue grows +16%).
Dan also initiated coverage of Southwest Airlines.
Dan assigned Southwest a “neutral” rating and a $7 target price.
In his note, Dan wrote,
Southwest is the industry’s best fundamental story and as such, continues to be a longer-term play on the industry. However, given our anticipation of upcoming earnings disappointments, we’d wait for a better entry point.
Southwest is transitioning from a growth carrier to a cyclical carrier, but it’s not there yet. Substantial market share gains against weak legacy carriers underpin our view that the industry consolidates over the next two years, and Southwest is positioned to be a primary beneficiary.
Our slightly more aggressive valuation multiple vs the Street partially factors in earnings optionality from further industry consolidation over a 2 year time horizon.
Despite a cost structure that has inflated over the years, Southwest is still the lowest cost producer. And its cost advantage is set to widen as legacy carriers reset labor contracts higher.
In the near term, Dan said the airline’s revenues and cost headwinds are pressuring margins. Because or this, and the fact the airline now has to renegotiate its pilot contract, Dan advises, “We’re not telling investors to race into thie stock, though for those that can look longer-term, Southwest continues to be a great play on the industry.”
And finally, Dan also initiated coverage on AirTran this week. AirTran also received a “neutral” ranking from McKenzie, along with a $7 price target.
In his note on AirTran, Dan wrote,
Following years of growth, AirTran, along with others, is responding to a demand shock by cutting growth and spending. The network changes position the carrier to report profits and begin the process of balance sheet repair (which is in contrast to AirTran’s 2008 loss that nearly erased five years of profits).
AirTran, like others, lacks adequate pricing power given industry overcapacity which means profits will remain levered to fuel prices. However, when removing fuel from the equation, upside to our modest profit this year and next appears unlikely based on our proprietary network study.
We found competitors cutting head to head flying on AirTran’s routes by 1.9% in 2Q09 and by 5.5% when factoring in indirect competition. While it’s always encouraging to see less capacity, AirTran’s competitive dynamic nonetheless ranks last on our industry measures.
AirTran’s smaller size and lack of dominance in its markets leaves its revenues more exposed (vs peers) to larger and better capitalized competitors. As one of the lowest cost, lowest fare carriers in the industry, AirTran’s cost structure is thus a critical source of competitive advantage.
AirTran’s current level of liquidity is not robust and limits the carrier strategically, but it’s adequate. And while AirTran’s liquidity strengthens on our outlook, an even stronger balance sheet would aid AirTran’s competitive position and revenue stability. As a result, we don’t rule out new equity issues (perhaps in the $7 to $10 stock price range).