Goldman Sachs is bearish on the U.S. airline sector, significantly cutting airline target prices

According to the Zhitong Finance APP, Goldman Sachs' macro team currently predicts a 45% probability of a U.S. economic recession. Considering the increasing economic and geopolitical uncertainties, Goldman Sachs has "substantially" lowered the demand level for air travel in 2025 and downgraded the outlook for the U.S. airline industry.

Although airlines are expected to perform better than in previous economic slowdowns due to capacity reductions, industry consolidation, and more diversified revenue, Goldman Sachs has lowered the target price-to-earnings ratios for all airlines, thus downgrading the rating for American Airlines (AAL.US) from "Neutral" to "Sell."

Goldman Sachs analyst Catherine O'Brien stated, "The relatively high leverage on American Airlines' balance sheet and operational leverage has led us to significantly downgrade our outlook for the industry... As the profitability of the entire industry and American Airlines is negatively impacted by declining demand, we now expect American Airlines' free cash flow to decrease."

Given O'Brien's downgrade of American Airlines' outlook, she now expects free cash flow in 2025 to decrease by more than half, which will push the company's debt-to-EBITDA ratio from 4.2 times previously to 5.0 times. O'Brien also halved the target price for American Airlines to $8 and lowered the earnings per share forecast to below the market consensus. The higher operational leverage of American Airlines will have a more pronounced impact on revenue, with O'Brien forecasting earnings per share of $0.90/$2.45 for 2025/2026, while Wall Street consensus is $1.74/$2.62.

Meanwhile, O'Brien upgraded the rating for SkyWest (SKYW.US) from "Neutral" to "Buy," as the company is seen as one of the most defensive stocks within Goldman Sachs' coverage due to its primary contract revenue structure, strong balance sheet, and stable free cash flow situation.

O'Brien stated, "We expect SkyWest's revenue and profits to be much less affected by the current economic backdrop compared to other U.S. airlines." She referred to the acquisition agreements SkyWest has reached with its partner airlines. Last year, due to pilot attrition post-pandemic, revenue from partners accounted for 84% of SkyWest's total revenue. Under these capacity purchase agreements, SkyWest primarily receives fixed rates based on operational metrics, making the airline less affected by fare environments compared to others.

To reflect the increasing geopolitical and macroeconomic uncertainties across the industry, O'Brien also lowered the target prices for other major airlines:

Alaska Air Group (ALK.US) target price lowered by 16% to $71, with a Buy rating;

Allegiant Travel Company (ALGT.US) target price lowered by 39% to $56, with a Neutral rating;

JetBlue Airways (JBLU.US) target price lowered by 45% to $3, with a Sell rating; Southwest Airlines (LUV.US) lowers target price by 18% to $23, with a sell rating;

Sun Country Airlines (SNCY.US) lowers target price by 23% to $13, with a neutral rating;

United Airlines (UAL.US) lowers target price by 30% to $92, with a buy rating;

Delta Air Lines (DAL.US) maintains target price at $60, with a buy rating