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3 Airlines Bank of America Expects To Fly Higher In 2018

Elizabeth Balboa

The federal tax cut is giving corporations a little extra cash to work with, and Bank of America Merrill Lynch said airlines could take advantage of their clients’ expanded spending power.

The Rating

BofA Merrill Lynch analysts Andrew Didora and Emma Young upgraded American Airlines Group Inc (NASDAQ: AAL) from Underperform to Buy and Spirit Airlines Incorporated (NYSE: SAVE) and Allegiant Travel Company (NASDAQ: ALGT) from Neutral to Buy.

BofA maintained Buy ratings on Delta Air Lines, Inc. (NYSE: DAL) and United Continental Holdings Inc (NYSE: UAL).

Southwest Airlines Co (NYSE: LUV) and Alaska Air Group, Inc. (NYSE: ALK) caught downgrades from Buy to Neutral and JetBlue Airways Corporation (NASDAQ: JBLU) from Buy to Underperform.

The Thesis

The analysts expect a tax-related increase in corporate spending to drive a long-anticipated hike in corporate airline pricing.

“We expect leisure to remain the steady component it has been this cycle, but we estimate corporate pricing is down 14 percent over the past several years,” the analysts said in a Tuesday note. “A recovery here should benefit the legacy airlines, given about two-thirds of their revenue comes from corporate.”

Delta, United and American stand to profit from their corporate exposure, compounding anticipated outperformance in international flights, according to BofA. 

Their hikes should boost the industry's passenger revenue per available seat mile, which is down 7 percent from 2014’s peak, the analysts said. With Spirit and Allegiant down a respective 25.4 percent and 13.5 percent, the low-fare lines boast significant growth opportunity. 

Leisure carriers caught Bank of America downgrades primarily in accordance with the analysts’ Barbell strategy.

Price Action

At the time of publication, Delta was down nearly 1 percent and JetBlue was up 0.66 percent. Allegiant was up 1.86 percent, Spirit 0.56 percent, American Airlines 0.55 percent and United 0.36 percent. Southwest was down 1.44 percent and Alaska 1.31 percent.

U.S. Global Jets ETF (NYSE: JETS) traded was down slightly at $32.40. 

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Latest Ratings for AAL

Date Firm Action From To
Jan 2018 Bank of America Upgrades Underperform Buy
Nov 2017 Morgan Stanley Maintains Equal-Weight
Nov 2017 JP Morgan Upgrades Neutral Overweight

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