By Tomi Kilgore, MarketWatch
Shares of American Airlines Group Inc. dropped Monday to help pace the declines in the airline sector, after Morgan Stanley turned bearish, saying a “cost reset” may be necessary.
Analyst Rajeev Lalwani cut his rating on American to underweight from equal weight, and slashed his price target by 35% to $26, which is 16% below current levels.
The air carrier’s stock /zigman2/quotes/209207041/composite AAL +5.61% slumped 2.7%, putting it on track for a seven-week closing low. That was enough to pace the Dow Jones Transportation Average /zigman2/quotes/210598063/realtime DJT +3.35% components that were losing ground. The Dow transports declined 0.2%, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.05% slid 71 points, or 0.3%.
Meanwhile, the NYSE Arca Airline Index /zigman2/quotes/210598447/delayed XX:XAL +8.98% slumped 1.2%. Also acting as a drag on the airline sector tracker, the U.S.-listed shares of Ryanair Holdings PLC /zigman2/quotes/204098489/composite RYAAY +5.10% /zigman2/quotes/202851567/delayed UK:RYA -0.24% dropped 2.6% after the Europe-based budget carrier warned that its full fiscal year profit would be hurt by the grounding of Boeing Co.’s /zigman2/quotes/208579720/composite BA +12.95% 737 Max planes.
Don’t miss : Ryanair warns of profit hit over 737 Max grounding.
“In our view, [American] has the most cost risk amongst its peers,” Lalwani wrote in a note to clients. “Specifically, within the next 18 months, the airline will have to renegotiate with about 70% of its labor force as agreements are amenable or set to be so for pilots, flight attendants, mechanics and customer service agents.”
And this comes at a time when cost inflation is hurting American and the overall industry, as airport, vendor and fleet-related expenses are all rising.
In its quarterly 10-Q filing with the Securities and Exchange Commission , American said it was removing all 737 Max flying from its fight schedule through Aug. 19, which is about 115 flights per day, or 2% of total capacity. Read more about American’s first-quarter report.
Boeing’s stock eased 0.8% in morning trade.
“Although these aircraft represent a small portion of our total fleet, its financial impact is disproportionate as most of the revenue from the cancellations is lost while the vast majority of the costs remain in place,” the company stated.
Lalwani said given the cost pressures, he believes consensus analyst estimates are too high by about 40% going into 2020.
He also downgraded Delta Air Lines Inc. /zigman2/quotes/200327741/composite DAL +7.80% to equal weight from overweight, while trimming his price target to $61 from $62.
Lalwani stressed that he was not getting bearish on Delta, and was only downgrading the carrier because he believed the good start to the year for the stock--it’s up 8.6% year to date--suggests the market’s valuation already reflects the company’s “well positioned” network structure, industry leading margins and strong balance sheet.
“[Delta] shares still have some upside, but it doesn’t stand out,” Lalwani wrote.
United Continental Holdings Inc.’s stock /zigman2/quotes/205037281/composite UAL +12.50% was one of the few gainers Monday, up 0.5% in morning trade, after Lalwani raised his rating to overweight from equal weight, and boosted his price target to $110 from $101.
“Over the last 12-18 months, United has done a solid job of executing on its midcontinent strategy, which we foresee continuing as the competitive backdrop remains benign in a high-cost environment,” Lalwani wrote.
Among other airline stocks, shares of JetBlue Airways Corp. /zigman2/quotes/207639051/composite JBLU +9.31% shed 0.8%, Southwest Airlines Co. /zigman2/quotes/201071949/composite LUV +5.63% inched up 0.1%, Alaska Air Group Inc. /zigman2/quotes/200972303/composite ALK +8.56% gave up 0.8%, Hawaiian Holdings Inc. /zigman2/quotes/203188135/composite HA +6.74% dropped 3.6% and Spirit Airlines Inc. /zigman2/quotes/205782179/composite SAVE +19.46% eased 0.9%.