Like American, Spirit Is Downgraded Due to Dallas Price Wars
NEW YORK ( TheStreet) -- A Wall Street analyst last week downgraded shares of American (AAL) - Get Report partially because of the price wars in Dallas since Love Field opened to more flights. This week, it's Spirit's (SAVE) - Get Report turn.
On Sunday, Stifel analyst Joseph DeNardi downgraded Spirit to "hold" from "buy" due to "competitive capacity growth and softer pricing trends," particularly in Dallas.
"We have become increasingly less comfortable with expectations for pricing improvement in Dallas in 2Q and 3Q given the number of new non-stop routes Southwest (LUV) - Get Report has coming online," DeNardi wrote in a report. "Some of (it) overlaps Spirit.
"While we continue to expect these fares and yields in Dallas to improve as the markets mature and promotional pricing winds down, the pricing headwind is likely to persist through the end of the year and could actually get worse as Southwest launches new routes in April and August," he wrote, noting that overlap exists with pending Southwest service to Sacramento (Spirit serves Oakland), Detroit, Philadelphia and Pittsburgh (Spirit serves Latrobe). "In addition, much of Spirit's planned growth in 2015 is coming in markets where it is more like to see a competitive response, in our view, including Houston (Southwest out of Hobby) and Atlanta (Delta (DAL) - Get Report)," he wrote.
Spirit shares traded at $76.70 on Monday, down $1.08. Shares in every other major airline were up. Spirit shares year to date are up 1.5%.
For the current quarter, DeNardi estimates earnings of 91 cents a share. Analysts surveyed by Thomson Reuters estimate 99 cents. For the full year, DeNardi estimates earnings per share of $4.85 a share. Analysts surveyed by Thomson Reuters estimate $5.22.
Also for the current quarter, DeNardi estimates a 14% decline in passenger revenue per available seat mile (PRASM). That compares to a 7% decline in the fourth quarter of 2014 and to a consensus estimate of a 9% decline in the current quarter. "We believe the 9% consensus estimate assumes an overly aggressive improvement in the pricing environment in 2H15 relative to new competitive capacity overlap and higher ASM growth from Spirit," he wrote.
Last week, Cowen & Co. analyst Helane Becker downgraded shares of American to market perform from outperform, saying she sees unhealthy PRASM trends.
"American will likely underperform its peers in terms of PRASM growth as a result of pricing pressure in Dallas and in Latin America," she wrote. "The reason for the underperformance is a result of Southwest's promotional fares in the Dallas market and capacity/currency issues within Latin America."
In the current quarter, Becker noted, American is guiding toward a PRASM decline between 2% and 4%, while overall industry PRASM should be plus or minus 1%.
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-- Written by Ted Reed in Charlotte, N.C.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.