American Airlines outlook downgraded; TAM's improving

American Airlines shares dropped 5.9% yesterday. The company’s outlook was downgraded from “buy” to “neutral” by UBS. UBS believes that the carrier’s efforts to cut distribution costs, by switching to direct connection with online users, rather than third party providers, is “very likely” to damage its near-term earnings.

Elsewhere, shares in Allegiant Airlines were down 5.1%. The carrier reported Dec-2010 traffic increased 12.5% year-on-year, while load factor dropped 1.1ppts to 89.5%. Allegiant expanded capacity in Dec-2010 by 13.8%. Full-year traffic increased 16.4% year-on-year, while capacity was up 16%. Allegiant forecast lower growth in early 2010, projecting capacity increases of 3-5% in 1Q2011 and 4-8% in 2Q2011. US Airways shares dropped 4.4%.

Canadian carriers saw their shares rise, with WestJet up 3% and Air Canada B Shares gaining 2.8%. Canadian airfares are expected to follow US fares upwards over the short term, with airlines looking to offset the higher price of oil. US crude futures reached USD91.11 per barrel yesterday.

Zacks upgraded TAM’s rating from “neutral” to “outperform”, citing the carrier’s proposed merger with LAN Airlines. Shares in TAM rose 1.9%, while GOL shares gained 2.5%.

Selected North American airlines daily share price movements (% change): 11-Jan-2011