UBS assumed coverage of U.S. airlines with an updated outlook, assigning Buy ratings to Alaska Air (NYSE:ALK) Group, Delta Air Lines (NYSE:DAL), and United Airlines while downgrading Southwest Airlines (NYSE:LUV) and JetBlue Airways (NASDAQ:JBLU) to Sell.
The research note focuses on supply-demand dynamics, revenue diversification, and balance sheet strength to guide its ratings.
UBS expects capacity reductions to bolster revenue per available seat mile (RASM) and improve margins across the sector in 2025.
“We expect the downshifting of supply growth from 5%-6% in 1H24 to 1%-2% growth in 2H24 to support an improvement in supply/demand,” the bank said.
Delta, United, and Alaska earned top marks for their “strong and more diverse revenue growth drivers” and healthier balance sheets, making them better positioned to withstand risks such as cost inflation and shifts in travel demand.
UBS highlighted their high single-digit pretax margins as evidence of resilience.
In contrast, Southwest and JetBlue are expected to face headwinds. UBS cited Southwest’s weak 2024 pretax margin (~1%) and valuation concerns, saying its execution risks remain high.
JetBlue’s negative margin projection for 2024 (-5.2%) and high leverage (8.7x net debt/EBITDAR) also led to the cautious stance.
Broader industry challenges reportedly include elevated debt, ongoing supply chain issues, and production disruptions from OEMs like Boeing (NYSE:BA).
“Pressure on RASM in 1H24 due to excess capacity has caused a rapid response from several airlines to reduce capacity,” UBS explained.
UBS sees corporate travel as a potential bright spot, with 97% of U.S. travel managers expecting spending to be flat or increase in 2025, according to its proprietary Evidence Lab survey.
The firm’s methodology emphasizes airlines with diverse revenue streams, robust balance sheets, and proven profitability。