MW Economic worries may soon hit the airline industry, one analyst cautions

By Steve Gelsi

Southwest's stock loses altitude as a JPM Morgan analyst downgraded the carrier to underweight

Southwest Airlines Co.'s business and other airlines may be impacted by reduced government travel and potential weakness in consumer spending in the months ahead, one JPMorgan analyst said Monday.

It's not all doom and gloom, however, as JPMorgan's Jamie Baker stuck to overweight ratings on five airline stocks, noting that carriers that offer a higher level of service and robust customer loyalty programs are positioned to outperform the overall stock market.

Southwest's stock $(LUV)$ fell 2.8% in premarket trading after Baker downgraded the carrier to underweight from neutral as Wall Street ponders the impact of government layoffs and rising tariffs on Americans.

"Investor consternation has crescendoed once again, focused primarily on the consumer, domestic capacity, and the impact of reduced government travel," Baker said Monday in a research note. "As a result, share price momentum in 2025 has eased considerably (for most) from thetorrid pace witnessed in last year's final months."

Baker also downgraded Air Canada (ACDVF) to neutral from overweight.

He reiterated overweight ratings on American Airlines Group Inc. $(AAL)$, Delta Air Lines Inc. $(DAL)$, United Airlines Holdings Inc. $(UAL)$, Alaska Air Group Inc. $(ALK)$ and Sun Country Airlines Holdings Inc. $(SNCY)$.

JetBlue Airways Corp. $(JBLU)$ was kept at neutral, while Frontier Group Holdings Inc. $(ULCC)$ is still rated underweight.

Baker reduced his first-quarter revenue growth forecast for American Airlines to 3% from 4.5% due to the potential loss of business from government workers who have been laid off. About 2% of American Airlines' sales come from government travel.

Although JetBlue is still rated neutral it offers an "attractive risk/reward" at recent share price levels, he said.

Airlines typically face uncertainties around fuel prices and economic strength, but investors have been more focused on the latter, Baker said.

"The skew toward macro uncertainty has perhaps never been higher," he said.

In the current environment, "it's a good time to run a full-service global airline with a high dependence on premium and loyalty, whereas opposing business models are having a tough go" except for Sun Country Airlines, he said.

"We remain convinced that Southwest's best margin and return on invested capital days lie in the past," Baker said. "While we're all for well-managed turnarounds, the ask at Southwest (if one embraces the concept of returning to the industry's margin perch) is herculean in nature, in our view."

Also read: Southwest bends further to activist shareholder Elliott's demands

-Steve Gelsi

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March 03, 2025 07:45 ET (12:45 GMT)

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