American Airlines downgrade, Delta's weak third quarter weigh on airline stocks – MarketWatch


Airline stocks were under pressure Tuesday after grim quarterly results for Delta Air Lines Inc. and a downgrade for American Airlines Group Inc.

Delta
DAL,
-2.66%

earlier Tuesday reported a wider-than-expected third-quarter loss as passenger revenue dropped 83%. Sales fell 76% to $3.06 billion, also below Wall Street expectations.

Related: Boeing Q3 deliveries are roughly half of Q3 2019 deliveries

Analyst Stephen Trent at Citi kept his buy rating on Delta shares, saying that Delta’s response to the pandemic and the crimp that travel restrictions put on air travel “looks about as good as any global network carrier could have managed under the circumstances.”

Delta’s “medium-term outlook seems more relevant for the carrier’s investment case than the completion of the second toughest quarter in aviation history,” he said. Liquidity of $21.6 billion “looks strong vs. 3Q’s daily cash burn” of $24 million and September’s level of just $18 million, he said.

Passenger demand is improving, but Delta sees fourth-quarter revenue at one-third of fourth-quarter 2019. In a call with analysts, the carrier highlighted its cleaning protocols and its middle-seat blocking policy.

Delta shares have lost 46% this year, contrasting with gains around 9% for the S&P 500 index.
SPX,
-0.63%

The carrier’s year-to-date losses compare with a 60% drop for United Airlines Holdings Inc.
UAL,
-3.07%

stock and a 57% drop for American Airlines’
AAL,
-5.41%

shares in the same period.

American Airlines stock was downgraded to the equivalent of sell, from neutral, by analysts at Susquehanna, led by Christopher Stathoulopoulos.

The analysts said they “continue to want to own airlines that are built for low cost (or said another way, point-to-point carriers with homogenous fleets) and, importantly, have solid liquidity runways.”

They kept their buy ratings on Delta as well as Southwest Airlines Co.
LUV,
-0.15%

and upgraded Alaska Air Group Inc.
ALK,
-1.06%

to buy as well. Alaska has “ample cash” and a relatively young fleet among its positives, the Susquehanna analysts said.

“At the same time, we’re downgrading hub-and-spoke carrier (American Airlines) to negative, as we see mid-term risk increasingly skewed to the downside, given leverage (4.9x net-debt-to-EBITDA into the crisis) and uncertainty around a recovery,” they said.

Airlines have curtailed their schedules, slashed capacity, and received billions from the U.S. government to avoid layoffs. Industry observers don’t expect a recovery to prepandemic levels until three years from now, and some capacity may be lost for longer.



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