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Raymond James updated its estimates for U.S. airlines ahead of Q1/23 earnings reports this month, primarily due to a lowered fuel price forecast, and upgraded Alaska Air (NYSE:ALK) to Strong Buy from Outperform with a price target of $68.00 (from $60.00), and SkyWest (NASDAQ:SKYW) to Market Perform from Underperform.
Due to a high level of uncertainty, the firm expects a decrease in demand, though not severe. It still anticipates favorable performance for airline stocks in a shorter and/or shallower downturn scenario (albeit, perhaps not in the very near term).
The firm upgraded Alaska Air as the company exits its seasonally weakest quarter and prepares to complete its A320/Q400 fleet transition in May. While favorable hedges in 2022 create tougher year-over-year comparisons relative to most peers and the A321 fleet transition in H2/23 and greater exposure to the Tech sector remain potential risks, the firm believes a relatively unimpaired balance sheet and commercial initiatives will drive strong shareholder value.
Regarding SkyWest, the firm mentioned that attrition levels appear to be improving after the reset in regional pay rates and mainline hiring moderating somewhat. “Qualifying captains from first officer remains the key impediment as there does not appear to be a shortage of new first officers applicants, with the shortfall likely to take 18-24 month to address,” said the firm.
Although near-term earnings don’t support valuation, the firm maintains its view that SkyWest is well-managed, has a solid balance sheet, and is poised to be a structural winner in the regional airline sector.
