Raymond James downgraded Frontier Group Holdings, Inc. (ULCC) and Spirit Airlines (NYSE:SAVE) to Underperform from Market Perform with revised earnings forecasts and target prices. This downgrade reflects a less optimistic outlook on fuel costs and weaker fare trends than previously anticipated.
Analysts believe post-summer capacity adjustments by Frontier and Spirit are insufficient, leading them to assume a less favorable fare environment in the second half of 2024. The upcoming earnings season is expected to be challenging, especially for these budget carriers.
While Raymond James acknowledges a potential industry-wide benefit from constrained capacity due to Original Equipment Manufacturer (OEM) supply chain issues, analysts believe the medium-term risks outweigh the potential benefits for Frontier and Spirit in particular.
Raymond James adds that Frontier's recently introduced bundled fare offerings raise concerns about potential fare erosion beyond Basic Economy if the strategy backfires.
Domestic U.S. airline capacity remains elevated, despite some post-summer adjustments planned by carriers. Analysts believe this excess capacity, combined with potential softening consumer trends and pre-election impacts on corporate travel, could lead to headwinds in the coming quarters.
While OEM supply chain issues might eventually lead to a favorable environment for airlines, the firm says delays in deliveries are expected to persist throughout 2024 and potentially into 2027, impacting Frontier and Spirit's ability to capitalize on a potential capacity shortage.
These factors, along with recent pilot furlough announcements by Spirit and Mesa Airlines, contribute to analysts' negative outlook for Frontier and Spirit in the near to medium term.