Best Airline Stocks to Buy Amid a Rocky Recovery
Airline stocks are widely viewed as major beneficiaries of a global reopening. But some carriers look better than others, especially in the face of Delta-variant turbulence.
Airline stocks, like the rest of the travel industry these days, can't seem to catch a break.
After surviving the initial wave of COVID-19 and seeing travelers tentatively taking to the skies again, the Delta variant came along. But there's a silver lining: This time around, the impact doesn't seem as dire.
While travelers' fear over the Delta variant "may continue to drive a choppy recovery," says Raymond James analyst Savanthi Syth, the risks are seen as abating "particularly due to increasing vaccine penetration," albeit with regional differences. Helping things is the recent full FDA approval of the COVID vaccine co-developed by Pfizer (PFE) and BioNTech (BNTX).
Travel trends are getting brighter: Flight bookings and yield trends for the second half of the year and first quarter of 2022 are "tracking fairly positive," says Susquehanna analyst Christopher Stathoulopoulos. This suggests that traveler confidence "has not meaningfully eroded" despite the resurgence of COVID cases, he adds.
Tellingly, airlines also are signaling via their spending that they're less fearful. In the second quarter, the industry shifted from cash conservation to investing "precious capital" for the future as the pandemic waned, especially in the U.S., according to Peter McNally, global sector lead for industrials, materials and energy at research firm Third Bridge Group.
Read on as we take a closer look at how nine airline stocks look amid this rocky road to recovery. Not all carriers are created equal; the best airline stocks are flying on far sturdier wings than their peers. We'll look to identify the strongest candidates.
Data as of Sept. 22. Analyst ratings provided by S&P Global Market Intelligence.
- Market value: $13.3 billion
- Analyst ratings: 5 Strong Buy, 0 Buy, 10 Hold, 3 Sell, 4 Strong Sell
The largest airline in the world, American Airlines (AAL, $20.52) was in the midst of paying back debt when the pandemic derailed its deleveraging plans. At the end of 2020, the carrier had $41 billion in debt, which was higher than its competitors, after years of capital expenditures and share buybacks, according to Fitch Ratings.
But its financials, although not out of the woods, began improving. In June, Fitch raised its outlook for the carrier to Stable from Negative to reflect its improved finances, passenger traffic rebound and a potential lift for the industry as more people get vaccinated.
Currently, American is taking steps to get its house in order by reducing debt and spending. It is accelerating debt repayments, with a plan to pay down $15 billion by the end of 2025, according to Raymond James analyst Savanthi Syth. However, that also means liquidity will fall from $21 billion at the end of the second quarter to $10 billion to $12 billion next year, she says. Syth has a Market Perform rating on the stock, which is equivalent to a Hold.
AAL is tightening its belt on the capital expenditures front as well, lowering spending to $2.6 billion a year for 2022 and 2023 – far below Syth's forecasts for Delta Air Lines (DAL) and United Airlines (UAL).
The carrier's moves come in light of its forecast for a third-quarter loss, which "is not encouraging," Syth notes. "This is in contrast to legacy peers guiding to profitability despite a less favorable geographic mix, resulting in a slower revenue recovery vs. American."
One bit of good news: In July, AAL's revenue came in higher than expected. And while August numbers were weaker than anticipated due to the Delta variant, the company's "book business for the holidays continues to be very strong," Vasu Raja, American's chief revenue officer, said at Cowen & Co.'s 14th Annual Global Transportation & Sustainable Mobility Conference earlier this month.
As far as airline stocks go, most analysts are lukewarm toward this one. Argus Research also has a Hold rating on AAL, citing the impact from the grounding of the 737 MAX aircraft, Delta variant headwinds and high debt levels.
- Market value: $14.8 billion
- Analyst ratings: 6 Strong Buy, 2 Buy, 10 Hold, 2 Sell, 1 Strong Sell
Among the three legacy airline stocks, United Airlines (UAL, $45.68) is the most internationally focused, with nearly 40% of its 2019 revenue coming from travelers going abroad, according to Morningstar analyst Burkett Huey.
However, as international travel wilted during the pandemic, one saving grace for United has been its practice of tightly managing costs, which helped it get through a sharp drop in business last year. "We think that consistently being the lowest-unit-cost legacy carrier since 2016 is evidence of strong management," Huey writes in a recent report.
UBS analyst Myles Walton has a Buy rating on United. He says that United surprised Wall Street recently by forecasting positive adjusted pre-tax income for the third and fourth quarters. The consensus was a third-quarter loss, as was his projection. "The positive third-quarter outlook was very encouraging," Walton adds.
Walton says UAL's management was also "bullish" on travel continuing to recover despite the surge in Delta infections – its recent customer survey shows more than 80% of its MileagePlus members have been vaccinated. United's outlook for international and business travel is for Europe to recover in 2022 as more borders reopen while Asia is further out, in 2023.
Another positive note: Business travel trends at United, although still weak, are improving. It is now down by around 60% compared to 2019 – improving from a drop of 90% in prior months.
Jefferies analyst Sheila Kahyaoglu, however, has a Hold rating on the airline stock. While United is "poised to be the first U.S. network carrier to return to 2019 capacity levels," its $17 billion in planned capital expenditures through 2023 will dent cash flow and restrict its ability to pay down debt, thus "limiting value creation potential," she says.
Delta Air Lines
- Market value: $26.6 billion
- Analyst ratings: 10 Strong Buy, 4 Buy, 10 Hold, 0 Sell, 0 Strong Sell
Delta Air Lines (DAL, $41.59) is considered to be "highest-quality" among the Big Three legacy airline stocks. This is due to its ability to attract the most profitable business travelers – thanks to a cabin-segmentation strategy and its co-branded credit card partnerships, mainly American Express (AXP), Morningstar analyst Burkett Huey says.
The airline's "five-cabin segmentation" strategy gives high-spending travelers the option to upgrade to more luxurious options when they can. Also, Delta gets "top dollar" when it sells miles to American Express, which, in turn, awards it to cardholders.
Raymond James analyst Savanthi Syth recently upgraded the stock to Strong Buy from Market Perform. While risks remain in the industry, fundamentals are improving and so is demand for business travel. With the mid-summer selloff in airline stocks amid an increasingly favorable view on the sector, "we find Delta too hard to ignore at current levels," she says.
DAL said U.S. business travel demand was at 40% of 2019 levels in June, and should rise to 65% to 80% by the fourth quarter, Syth adds. In a Delta survey, 5% of large corporate customers believe business travel won't fully rebound, but that is an improvement over 8% saying so in a prior survey. "The recent trajectory is encouraging," the analyst says.
Argus Research analyst John Staszak has a Buy rating on Delta, but recently cut his price target by $10 to $48. While the airline posted a "solid" second quarter, the third quarter will be "difficult" due to a projected 11% to 14% increase in CASM (cost per available seat mile) vs. the same quarter in 2019. The good news is DAL should return to profitability in the second half of 2021 and free cash flow should remain positive, he writes in a note.
Longer term, Staszak expects Delta to benefit from new routes and partnerships with other carriers, once the overhang from COVID-19 passes.
- Market value: $30.0 billion
- Analyst ratings: 13 Strong Buy, 5 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Since its early ground-breaking days in the airline industry, Southwest Airlines (LUV, $50.65) has been executing solidly, even as the regional air transport market had gotten more crowded with competitors.
The pandemic has shaken the industry to the core, and only the best-positioned airline stocks will have the fastest recovery. As the largest domestic U.S. airline offering low-cost fares to leisure travelers, Southwest Airlines will likely be one of those carriers.
"We think that Southwest is among the best low-cost carriers, with a clean balance sheet, a strong management team and low costs and fares," Argus Research analyst John Staszak says. He points out that the airline has billions in liquidity – critical in a capital-intensive industry when business conditions are worrisome – and targets leisure travelers, which is a segment rebounding faster than business travel.
As such, "Southwest appears well-positioned to emerge from the coronavirus pandemic," Staszak adds. He maintains a long-term Buy rating on the stock, due to Southwest's track record of "above-peer-average revenue growth, driven by its simple fare structure and reputation for generally good customer service." However, the analyst did recently cut his target price by $10 to $60, an indication of the headwinds still buffeting the industry.
Jefferies analyst Sheila Kahyaoglu also has a Buy on the stock, saying that despite near-term challenges, Southwest has "the most difficult to replicate domestic network" that serves as a competitive advantage.
Moreover, the airline had the foresight to expand aggressively into 18 new cities through the pandemic, which will result in Southwest effectively pulling "years of network growth forward," Kahyaoglu adds. Today, Southwest has the largest domestic network in 26 of the top 50 U.S. cities.
- Market value: $4.8 billion
- Analyst ratings: 5 Strong Buy, 4 Buy, 5 Hold, 1 Sell, 1 Strong Sell
JetBlue Airways (JBLU, $15.18) is a low-cost airline serving primarily U.S. markets whose shares have been pummeled of late. But the selloff might have been overdone.
Deutsche Bank analyst Michael Linenberg says the airline is forecasting positive EBITDA (earnings before interest, taxes, depreciation and amortization) for the second half of 2021. Yet despite the news, disclosed in the company's second-quarter earnings results, JBLU stock fell on the day of the announcement.
But Linenberg's outlook on the carrier remains positive. "We are narrowing our loss forecast for the year and feel even more confident about our forecasts in the out years." He further points out that the airline stock is undervalued: "Valuations are not even close to being stretched."
With JetBlue's management indicating that the carrier would be aiming for investment-grade credit ratings by 2024, meaning that it expects to be in a better financial position to repay debt, "there is a real, tangible, deleveraging story here as well," Linenberg says. "We see an attractive entry-point on the selloff" of the stock, he adds.
Raymond James analyst Savanthi Syth says JetBlue's second quarter had both good and bad news. The good news was that fares have recovered to 2019 levels and its other revenue initiatives are ramping up; the bad news out of the quarter was JBLU's higher-than-expected CASM outlook. Nevertheless, she says, the good outweighed the bad.
Syth also points to JetBlue's actions to lower its debt burden, which will make a dent on its interest payments (from about $230 million in annual run rate in the second half of 2020 to around $165 million in the second half of 2022). As such, she maintains her Outperform rating, which is the equivalent of a Buy.
Alaska Air Group
- Market value: $7.2 billion
- Analyst ratings: 10 Strong Buy, 3 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Alaska Airlines, whose parent is Alaska Air Group (ALK, $57.45), turned profitable in June as "vaccinations unleashed a surge of pent-up domestic leisure travel demand in the U.S.," CFRA analyst Colin Scarola says.
With domestic air passenger traffic trending higher from June into July, "we expect an unabated demand recovery" for Alaska that leads to "material" profits in the third and fourth quarters, Scarola writes. He recently upgraded the airline stock to Strong Buy from Buy and raised his price target by $1 to $80.
Another reason why Scarola looks at Alaska Air favorably: Shares have fallen by around a fifth since mid-May "even as operations turned more profitable than expected in June and the outlook for the remaining international and business travel recovery has greatly improved since May." As such, the stock selloff is an "attractive buying opportunity," he concludes.
Importantly, ALK said it has exercised its option to buy a dozen Boeing 737-9 planes earlier than expected. This decision will "accelerate Alaska's growth" and represents a "prudent, long-term investment in our business," the carrier says.
UBS has a Buy rating on ALK. Analyst Myles Walton writes in a recent note that load factors (passengers filling available seats) at Alaska have steadily increased in the second quarter – from 70% in April to 86% in June. Cash flow turned positive in June as did pre-tax margins, he also notes.
Moreover, business travel rose in the second quarter and management guided to further improvements. Walton, however, cut his price target to $85 from $88 to reflect 2023 valuation expectations, discounted back a year.
Mesa Air Group
- Market value: $275.6 million
- Analyst ratings: 2 Strong Buy, 1 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Mesa Air Group (MESA, $7.68) is a regional carrier that operates American Eagle, United Express and DHL Express flights on behalf of its partners. In return, Mesa receives fixed fees for each aircraft used and is reimbursed for certain direct operating expenses, plus other related costs. It operates 165 aircraft with around 450 daily departures serving 95 U.S. cities, Washington, D.C. and Mexico.
Deutsche Bank analyst Michael Linenberg has a Buy rating on the stock. In a recent note, he writes that Mesa's total operating revenue rose 71% year-over-year in its fiscal third quarter, compared with a decline of 46% in the prior quarter.
Moreover, Linenberg says the airline grew its cash by 22% to $180 million quarter-over-quarter. Mesa posted a net income of $4.3 million (11 cents per share), but it was buoyed by a $26 million CARES Act government payroll support grant.
While the airline is not without its challenges, Mesa's low-cost structure and fleet mix improvements will likely raise its cost and operational efficiencies. And this "reinforces our belief that Mesa will remain an important partner with the opportunity to take on additional flying," says Raymond James analyst Savanthi Syth, who has an Outperform rating on the stock.
Moreover, while Mesa's business is tied to its partners' financial health, the likelihood of American, United and DHL filing bankruptcy is "unlikely," Syth adds. As such, she views the risk-reward tradeoff for the stock as "compelling."
COVID-19 woes also should hasten consolidation among regional airline stocks, and Mesa could benefit since it has one of the "most competitive" cost structures, Syth writes.
- Market value: $3.5 billion
- Analyst ratings: 10 Strong Buy, 2 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Allegiant Travel (ALGT, $197.29), which operates Allegiant Air, is a different breed of carrier with a singular business model. It sees airline seats as commodities that can lead to other ways to earn revenue from less capital-intensive and higher-margin operations, such as offering hotel rooms, car rentals and the like.
Consider that the company is restarting the development of its waterfront Sunseeker Resort in Port Charlotte, Florida,, which will offer shopping and entertainment services along with a rooftop pool and a 55,000-square-foot meeting and event space. Construction recently resumed and a tentative opening is slated for late 2022 or early 2023, according to Susquehanna analyst Christopher Stathoulopoulos, who has a Positive (Buy) rating on the stock.
While the analyst acknowledged that an airline and hotel combination might seem "odd," he nevertheless is bullish about Allegiant's venture. He cites the carrier's "strong" presence in Florida, opportunity to boost revenue through bundling travel services, "solid" air travel trends to Florida even through the pandemic and ALGT's decision to own and directly operate the resort, which will capture all of the margin and revenue upside.
Stifel analyst Joseph DeNardi has a Buy rating on the stock, noting that second-quarter revenue and EBITDA results beat estimates, although the company guided to lower-than expected-revenue for the third quarter. Nevertheless, Allegiant "has proven how differentiated and durable its core business model is through COVID, and we see little reason why that changes in the next 12 to 24 months," he says.
Raymond James analyst Savanthi Syth has a Strong Buy on the airline stock. She says ALGT is in a "unique" position to generate higher profitability in 2022 than pre-pandemic times "due to a differentiated business model, favorable demand exposure and opportunity to lower unit costs," plus a "strong" capital structure.
- Market value: $2.7 billion
- Analyst ratings: 5 Strong Buy, 2 Buy, 7 Hold, 0 Sell, 0 Strong Sell
Spirit Airlines (SAVE, $25.26) is an ultra-low cost carrier that offers substantially lower airfares and makes up for it by charging for baggage check-in, seat selection and other ancillary perks. Like with the other airline stocks, business has been improving.
In the just-concluded second-quarter, Spirit posted a narrower-than-expected loss while operating revenues were higher than the consensus estimate. Operating revenue rose 520% in the quarter compared to a year ago, while revenues improved 86% sequentially.
But Spirit received a black eye from investors for cancelling more than 2,800 flights over 11 days starting in late July, during the height of summer. CEO Ted Christie cited inclement weather, flight delays, staff shortages, technical problems and an unexpectedly large surge in demand among other issues for the disruption. (Spirit does not have agreements to rebook passengers on other airlines when flights are canceled.)
For now, Spirit has reduced its number of flights to avoid similar disruptions, but this will dent third-quarter revenue. The carrier is now forecasting revenue to be 4% to 11% below the same quarter in 2019.
In reaction to the news, SAVE shares hit a year-to-date low near $23 in mid-August, but have since stabilized. Analysts are optimistic for more upside ahead, too. According to S&P Global Market Intelligence, the average target price is $37.60, representing expected upside of nearly 50% over the next 12 months or so.