JPMorgan says US mainline carriers have wrestled the advantage from discounters.
Analyst Jamie Baker said that revenue guides from the Big Three carrier were significantly stronger and their margins are solidly higher that their lower-cost rivals. Put simply, he said: ”If a Discounter can’t outearn Delta and its recessionary risk profile is largely similar, why should it be worth more?”
The turning point for mainline carriers was the pandemic, says Baker., who highlights six phenomena contributing to the change in fortunes. Loyalty is singled out as a major advantage for mainline carriers as is their size and international profitability. He also notes that maintaining that size come with considerable capex and higher margins that low-cost carriers, but costs, especially staffing costs, are rising across rhe board and without that loyalt to fall back on, Baker suggests that the change in fortunes may continue for a long time. “…while we see a path to potentially higher post-COVID margins for the Big 3, we do not see as clear a path for Discounters to reclaim their once-held margin superiority,” says Baker, adding: “we expect the Big 3 to maintain their margin lead for at least several years, if not permanently”.
JPMorgan has aligned its rating of American Airlines with rival Delta and United by upgrading American to Overweight from Neutral. The team have lower their rating on Frontier Group to Neutral from Overweight and Southwest Airlines was also dropped to Neutral from Overweight.
Baker and the team credit American with working to reduce its debt stack and is ahead of its target to reduce its debt burden by %15bn by the end of 2025. “Simply put, we no longer view AAL equity as “trapped” by its debt burden.”