Goldman Sachs is shorting the airline sector's target price in the US stock market

The Zhitong Finance App learned that the Goldman Sachs macro team currently predicts that the possibility of a recession in the US economy is 45%. Considering the increase in economic and geopolitical uncertainty, Goldman Sachs “substantially” lowered the demand level of air travel in 2025 and lowered the outlook for the US aviation industry.

Although airlines should have performed better than the previous economic slowdown due to reduced capacity, industry consolidation, and more diversified revenue, Goldman Sachs lowered the target price-earnings ratio for all of its airlines and therefore downgraded the rating of American Airlines (AAL.US) from “neutral” to “sold.”

Goldman Sachs analyst Catherine O'Brien said, “American Airlines' relatively high balance sheet leverage and operating leverage have led to a sharp drop in our expectations for the industry's outlook... As the entire industry and American Airlines' profitability are negatively affected by falling demand, we now expect American Airlines' free cash flow to decline.”

As O'Brien lowered American Airlines' outlook, she now expects free cash flow to be reduced by more than half in 2025, which will drive the ratio of the company's debt to operating profit before taxes to rise 5.0 times from 4.2 times previously. O'Brien also cut American Airlines' target price in half to $8 and lowered earnings per share expectations to a level below general market expectations. American Airlines' higher operating leverage will have a more pronounced impact on revenue, with O'Brien forecasting earnings of $0.90/$2.45 per share in 2025/2026, compared to Wall Street's consensus of $1.74/ $2.62.

Meanwhile, O'Brien upgraded SkyWest (SKYW.US)'s rating from “neutral” to “buy,” and given the company's main contract revenue structure, strong balance sheet, and stable free cash flow, the company is regarded as one of the most defensive stocks within Goldman Sachs's focus.

“We expect SkyWest's revenue and profits to be much less affected by the current economic context compared to our other airlines in the US,” O'Brien said. He was referring to the acquisition agreement SkyWest has reached with its partner airlines. Last year, SkyWest's revenue with partners accounted for 84% of its total revenue due to the loss of pilots after the pandemic. Under these capacity purchase agreements, SkyWest mainly receives fixed rates based on operating metrics, which makes the airline less affected by the fare environment than other airlines.

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

Alaska Airlines Group (ALK.US) reduced target price by 16% to $71, buy rating;

Allegiance Travel Company (ALGT.US) reduced its target price by 39% to $56, neutral rating;

JetBlue Airlines' (JBLU.US) target price was reduced by 45% to $3, sales rating;

Southwest Airlines (LUV.US) reduced its target price by 18% to $23, selling rating;

Sun National Airlines (SNCY.US) reduced its target price by 23% to $13, neutral rating;

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

The target price for Delta Air Lines (DAL.US) remains unchanged at $60, with a buy rating.