Expect Turbulence After Airlines’ Strong Start

Just two weeks into 2014, and airline stocks are acting more like sexy biotech stocks than the airlines of old.

Associated Press

United Continental (DAL) has gained 20% since the start of the year, while American Airlines (AAL) and Delta Air Lines (DAL) have risen 15%. Southwest Airlines (LUV) has gained 11%.

Cowen’s Helane Becker and Conor Cunningham marvel at the strong start but worries about the impact of the bad weather:

In our 2014 outlook…we indicated we thought there were catalysts for airlines to trade higher; we didn’t expect it all in one week! Airlines reported very strong December traffic; as a result, we revised our 4Q13 EPS estimates higher…

The airlines cancelled +20k flights due to winter storms in the US Northeast/Midwest. We believe the industry impact to be $50MM to $100MM, with the higher end of the range more likely then we previously thought. As a result of the storms and cancelled flights, the airlines should see an artificial pop to PRASM. The PRASM increase is likely to be partially offset by an increase in costs, but airlines did not have fuel costs or landing fees while they were operating reduced schedules.

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Morgan Stanley’s John Godyn and team expect “a year of strength.” The write:

Historically, 1Q tends to be a choppier quarter than 4Q for the stocks and some notable sources of PRASM volatility on the horizon – most impactful being the Easter shift – could very well trigger pullbacks throughout the quarter. But – we see an earnings season characterized by strong 4Q13 results and upbeat forward commentary. And – the longer-term outlook continues to be robust above and beyond even an increasingly bullish cons. as recent guidance updates and resulting stock momentum confirmed.

Cowen’s Becker and Cunningham make the case for United Continental:

United will look to begin to return capital to shareholders in 2015. The company will likely announce their plans in late 2014, with a combination of dividend and share repurchase program. United has put in place a plan to smooth out CAPEX, which should enable the company to systematically return capital to shareholders. We view a capital deployment plan as a major catalyst for the shares.

Shares of United Continental have gained 0.4% to $45.26 today at 12:05 p.m., while American Airlines has dropped 1% to $29.05, Southwest Airlines has fallen 0.8% to $20.86 and Delta Air Lines is off 0.1% at $31.45.