With airlines having jumped double digits since the U.S. presidential election, Wall Street analysts begin the year more cautious on the recently-hot space, arguing that rising fuel and labor costs will dampen the industry's revenue recovery. 

COWEN HIGHLIGHTS COST CONCERNS: Cowen's Helane Becker warned Wednesday that airline stocks "will likely take a breather" given their already sharp moves as well as the potential for higher operating costs in 2017. The analyst explains that investors have largely ignored rising costs and focused solely on unit revenue trends, which, while set to improve in the new year, shouldn't overshadow the looming margin compression as fuel expenses creep higher and new labor agreements come into effect. Forecasting non-fuel unit costs to grow 3.1%, jet fuel to rise 15%, and adjusted profits to slump as much as 20%, Becker said she believes investors will turn their attention to those costs in Q2 "once unit revenue is on a positive path," adding that while the industry can continue re-rating upward, the space will likely take a pause first. The analyst lowered her ratings on American Airlines (AAL), Alaska Air (ALK), JetBlue (JBLU), Spirit Airlines (SAVE) and United (UAL) to Market Perform from Outperform. Her top pick for 2017 is Delta (DAL), followed by Southwest (LUV), SkyWest (SKYW) and Volaris, with the analyst explaining that both Delta and Southwest have labor deals behind them and will face easier year-over-year comparisons due to their technology outages last year.

MORGAN STANLEY ADJUSTS RISK APPETITE: Also weighing in on the airline industry's coming year, Morgan Stanley analyst Rajeev Lalwani said Thursday he is maintaining his Attractive call on the space given its "more stable path" for pricing and still-low stock multiples, though the double-digit surge in share prices leads him to adjust his "risk appetite." The analyst explains that U.S. carriers are set to continue their supply discipline in 2017 even as the incoming White House administration potentially drives tax reform and consumer stimulus, though he also warns that airline stocks have surged in recent months and that margin compression is "becoming a reality," potentially delivering a 350 basis point drop during the year. Lalwani upgraded Southwest to Overweight on its "defensive qualities," revenue opportunity and fuel hedges, while downgrading United to Equal Weight on execution risks and a relatively rich valuation.

DELTA REPORTS REVENUE MOMENTUM: Delta reported its December financial and operating performance yesterday, showing passenger unit revenue flat year-over-year "driven by strong demand trends and improving close-in domestic yields as Delta's capacity actions and revenue management strategies continue to benefit results." The figure follows 1% and 6.5% declines in PRASM for Delta's November and October, respectively.

PRICE ACTION: Shares of Delta are down 1.75% to $49.81 today after jumping roughly 2.5% Wednesday following its December performance update. Southwest, American Airlines, United and are also posting losses in the range of 1.25% to 3.4%, pulling back from the double-digit gains seen since November 8.