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U.S. Airline Rally May Resume After Summer

Credit Suisse

This week we hosted eight airlines and the Southwest pilots for small group meetings at our Boston Transports Conference.

Overall, tone from the airlines was consistent with earnings season, with some incrementally reassuring commentary that the domestic yield environment is showing signs of stabilization. While a positive, investors remain concerned about the rate of earnings compression if: 1) unit revenue declines persist for longer given the high likelihood 2017 brings another year of overcapacity; and 2) generous labor deals lead to ex-fuel unit cost inflation of 2%-4% for most.

Bulls are optimistic that a swifter unit revenue recovery will boost depressed valuations, particularly since the sector has fallen out of favor. Below are our takeaways.

The domestic yield environment is stabilizing. U.S. airlines generally noted that domestic close-in yields have stabilized since softening late June/early July, and reiterated their expectation that the fourth quarter will show quarter-over-quarter improvement in unit revenue (RASM) growth as capacity growth slows, exchange-rate headwinds subside and pricing actions lap. Airlines noted that September visibility is still low with less than 50% of the month booked; some expressed greater caution on off-peak (United Continental Holdings...