The XAL has rallied off its August bottom, but we see more to go as the stocks still bake in too steep a 2020 earnings decline, in our view. The last time the group multiple fell as low as it is today (50-60% discount to the S&P 500) was in 2015-16 when airlines were over-earning by ~50% following the big 2014-15 oil decline. The subsequent two years saw industry RASM crater 10%+ as airlines priced through the fuel move, washing away about one third of industry EBIT (vs. peak). We don’t think the group is over-earning to nearly that extent today. We are modelling ~flat industry EBIT in 2020 assuming ~5% blended industry capacity growth (+6% domestic and +3% int’l) and, on this, a ~2% industry RASM decline (+3% revenue growth). Nearer-term, our proprietary “RASM-Caster” analysis of agency ticket sales indicates a solid holiday demand outlook and we think this is enough to mostly offset the off-peak (Oct/Nov) weakness that airlines have been highlighting in recent investor meetings over the last few months. More specifically, we are picking up a ~400-bp sequential RASM acceleration in December, which we think is aided by a favorable calendar dynamic as mid-week Christmas and New Year holidays create two distinct weeks of peak holiday vacation fun. Harkening back to the last time this happened, Q4’13 revenue growth accelerated by ~150 bps vs. Q3’13 and the XAL ran ~15% between Q4 guidance in Oct’13 and results in Jan’14. It’s early to have complete confidence in our Dec forecast as <25% of Dec revenue has been ticketed, but based on what we can see, there’s room for some near-term enthusiasm. We prefer UAL/JBLU/ALGT.

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