Morgan Stanley Assumes Coverage on Airlines With Attractive Industry View (DAL) (UAL) (ALK) (SAVE)

Morgan Stanley assumed coverage airlines with an Attractive industry view. Analyst Rajeev Lalwani noted structural positives, impressive FCF, double-digit EPS growth, and valuation. However, Lalwani thinks it will take time for shares to advance, as capacity remains elevated.

"The bullish environment that propelled airlines 3-fold in 3-years may be tough to replicate given capacity adds above demand and lower pricing (~2-4%) through the rest of 2015. This carries into 2016 as we are modestly below consensus on unit revenues (by ~100bps). Robust FCF yields (at ~10%) and capital returns should limit additional downside here, but aggressive capacity cuts are key and will more likely be a factor next year," said Lalwani.

"With ~85% of supply owned by 4 airlines, better cost management, and capacity discipline, the industry's structure has surely improved. In fact, our scenario analysis suggests it is better positioned to handle downturns and now more likely to be profitable during recessions. Surprisingly, valuation is still reflective of the old days (~10x P/E & ~4x EV/ EBITDAR) and should be higher by 2-3 turns, even with cyclically high margins," added the analyst.

Morgan Stanley assumed coverage on;

• Delta Air Lines (NYSE: DAL), Overweight, PT $65
• United Airlines (NYSE: UAL), Overweight, PT $86
• American Airlines (NASDAQ: AAL), Equal-Weight, PT $49
• Alaska Air Group (NYSE: ALK), Overweight, PT $83
• JetBlue Airways (NASDAQ: JBLU), Equal-Weight, PT $23
• Hawaiian Holdings (NASDAQ: HA), Underweight, PT $25
• Southwest Airlines (NYSE: LUV), Underweight, PT 30
• Spirit Airlines (NASDAQ: SAVE), Overweight, PT 82
• Allegiant Travel (NASDAQ: ALGT), Equal-Weight, PT $200

Virgin America (NASDAQ: VA) was initiated with an Underweight rating and a price target of $30.00.

For an analyst ratings summary and ratings history on Virgin America click here. For more ratings news on Virgin America click here.

Shares of Virgin America closed at $29.59 yesterday.

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