In the last two days, two major Wall Street analysts have chimed in with their take on how they see higher fuel prices and a recessionary environment affecting the airlines in 2008.
Monday, Robert Barry with Goldman Sachs said in a note to investors that he remains “unenthusiastic about most airline equities” and has “little conviction recommending that investors buy U.S. airline equities.” His top pick is Delta Air Lines, which he rates “Buy,” followed by “Neutral”-rated Northwest Airlines.
Friday, Goldman Sachs upped its oil price forecast for $80 and $90 a barrel for 2008 and 2009, up from the $68 it had previously had in place.
The investment bank also raised its refining cost estimates by $2 a barrel each year.
In Barry’s note Monday, he noted the upped estimates, saying, “If the forecast proves correct it would imply a potentially severe cost and earnings headwind for airlines.”
Tuesday, JP Morgan analyst Jamie Baker said in a note that while normally legacy carriers lose billions during recessions, if one holds fuel and supply constant (a big IF, considering the last couple of days), the sector could still be expected to post a $1.4 billion profit in 2008.
Baker also pointed out that unlike 2001, this time legacy carriers have “nearly triple the cash, half the aircraft orders, & a Legacy-Discount cost spread at its narrowest ever. Pension reform and consolidation pressures further reduce Ch11’s appeal. We view risk as far lower than any prior recessionary precipice.”
But what hasn’t changed? “Legacies remain highly leveraged to Tech and Financial sectors, and labor is soon going to make a grab at shareholder profits, potentially spurring M&A. While Aug. data confirms leisure demand is alive & well, we believe Sept/Oct will test for critical corporate resilience.”
Baker also initiated coverage on both Delta Air Lines and Northwest.
Both were rated “overweight.” Baker sees both stocks as being “equally cheap.” Delta, US Airways and Northwest are now Baker’s top picks.
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