JPMorgan warns airline investors to brace for a turbulent earnings season

  • Airlines are facing plenty of headwinds this earnings season, most notably the grounding of Boeing’s 737 Max plane worldwide.
  • JPMorgan is warning investors that financial results are likely to come in at the lower end of the company’s forecasted ranges.
  • Southwest has already lowered its guidance in the face of the 737 Max crisis, and others could do the same.

In the face of rising fuel prices and an international crisis surrounding the world’s largest plane-maker, JPMorgan is warning clients that this earnings season could be a turbulent one when it comes to airlines.

“Our 1H estimates are reduced across the board on a combination of slightly higher fuel, slightly lower RASM, and Max groundings (where applicable),” Jamie Baker, the bank’s airlines analyst said in a note to clients last week.

“Frankly, we doubt this serves as the first (or last) such exercise investors will witness in this regard as we head into the customary pre-earnings housekeeping cycle.”

Delta, which escaped unscathed from the worldwide grounding of Boeing 737 Max jets in March, will kick off the earnings season on Tuesday when it reports first-quarter results. Last week, the Georgia-based carrier raised its profit guidance for the quarter.

Other airlines, however, haven’t been so lucky. Southwest warned investors ahead of the quarters end that its available-seat-mile growth would be about 1% annually, down from its previous forecast of 3.5% to 4%, thanks to its exposure to the 737 Max. Other US carriers affected by the grounding include United, American and Alaska.

Nothing should be a surprise, though

JPMorgan says those warnings have priced in most of the bad news for airline stocks.

“Shares have held up comparatively well since Southwest formally kicked off the pre-release season this week,” the report says. “Suggesting to us that stocks were already discounting a potential downward revision exercise.”

The bank remains overweight-rated on most airline names, with the exception of Southwest, on which it has an underweight rating. United and JetBlue have neutral ratings. As far as the actual earnings print go, JPMorgan isn’t changing its forecasts but expects airlines to report at the bottom range of their guidance.

“In the case of Delta, we expect Tuesday’s revised guide to remain within existing parameters (i.e. the $US0.70 to $US0.90 range), but at the lower end,” the bank said. “We similarly expect AAL/UAL outcomes at the softer end of guided ranges, though not by a degree expected to prompt managements to disclose prior to earnings.”

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