Skip Navigation Links

Bookmark and Share
The airlines need to make an unlikely move to boost performance (UAL, AAL, LUV, DAL)

airplane pilot waving smiling

  • Airlines must cut capacity to shore up profits and raise their stock prices, Morgan Stanley says.
  • Oil prices can — counter-intuitively — be a boost to margins, but will require other discipline from carriers.
  • All major US airlines have underperformed in 2018 thus far. 

Airline stocks have been a disappointment in recent months, and that isn’t likely to change until carriers cut capacity, Morgan Stanley warned clients this week.

Even as oil prices scream higher in 2018, which the bank has previously said is a good thing for the airlines as it forced them to spend more wisely, stocks won't begin to shine until they cut capacity to make up for the added cost — something investors see as unlikely.

"Airline stocks continue to underwhelm due to the combination of supply concerns and rising oil that have led to earnings revisions," analyst Rajeev Lalwani said in a note Tuesday. "For the group to perform better we believe capacity cuts are necessary, and from the Big Four [Delta, Southwest, American, and United] in particular."

Excess capacity — which usually shows up in the form of empty seats on flights — is bad news for airlines as leads to lower profit margins from unsold fares. Unfortunately, the bank says capacity cuts are unlikely, but will be at the top of investors minds as conference season approaches, when executives, analysts, and other insiders will be travelling to industry meetings around the word. 

"We do not foresee any major announcements given a level of management comfort with current profit outlook," Lalwani said. "This may imply on-going lackluster airline share performance, even if the risk-reward is improving per low investor expectations."

All of the four major US carriers have seen their stocks decline since the beginning of the year, with Southwest (-22%) down the most, following it’s fatal window blowout. United Continental (-1.32%) is the top performer of the group, while the S&P 500 benchmark index has climbed about 1% in the same time. 

"We are of the view that visibility on margin expansion is key for airlines shares to perform well from here," Morgan Stanley said. “And in our opinion, the primary way for this to be accomplished in a higher oil price environment is for reductions to supply growth."

SEE ALSO: Oil prices have been screaming higher - and that's actually good news for airlines this time around

Join the conversation about this story »

NOW WATCH: Jeff Bezos on breaking up and regulating Amazon

Full "The Business Insider: The Money Game" article

Disclaimer | Terms Of Use And Privacy Statement

© Metals News. All rights reserved.