Up, up and away: the story behind rising airline stocks

For years airlines have distinguished themselves by the weakness of their finances. But since they received a government bailout during the pandemic, the companies have rebounded, especially in the last three months.

The economy’s strength has brought demand from fliers, who had pent up demand for travel after being stuck at home during the pandemic. At times, such as this summer, the carriers have overreacted to that demand, expanding capacity too much. 

But for the most part, they are rationalizing their operations, shedding excess capacity. Some of that capacity reduction has been forced upon airlines by Boeing’s (NYSE: BA) woes, which have limited delivery of its jets.

Another factor boosting airline profits is their increased sale of premium seats with amenities such as increased legroom and free alcoholic beverages.

Oil prices

Weak oil prices also are helping airline stocks. US crude (NYMEX: CLG5) has dropped 19% since April 7 to $70.20 per barrel. Sluggish overseas economies and increased US production may push oil prices even lower.

US Global Jets ETF, the biggest exchange-traded fund focusing on airline stocks, has returned 30% in the last three months, 31% in the last year, and 9% annualized over the past three years.

Many investors expect the strength to continue for airline stocks, as the economy rolls along. The Atlanta Federal Reserve’s forecasting model puts annualized growth at 3.3% for the fourth quarter.

“Our outlook for US airlines is quite rosy in the near term, though these companies are acutely governed by the laws of gravity and economics,” writes Morningstar analyst Nicolas Owens. To be sure, the long-term outlook is more cloudy, as high costs remain an issue for the industry.

Circumstances differ a bit for each of the major airlines.

• American Airlines (NYSE: AAL). Stock up 45% over last six months.

The company raised its profit outlook in October, based on improved pricing power and a shift in its sales strategy that had pushed away corporate clients.

Still, Owens isn’t overly enthusiastic about the airline. “It will rein in capacity expansion and capital spending in the near term, as its competitors are also doing,” he says. “But these savings are largely offset by incremental cost growth.”

• Delta Air Lines (NYSE: DAL). Stock up 22% over last six months.

Delta’s profit gained 15% in the third quarter from a year earlier, and it sees a 25% to 44% increase in the fourth quarter.

But not all of the airlines’ troubles have disappeared. “Pandemic-related restructuring has not generated labor efficiencies at Delta, nor do we believe that the airline or its peers will benefit from elevated yields [revenue per passenger mile flown] indefinitely,” Owens says.

• JetBlue Airways (NASDAQ: JBLU). Stock up 27% over last six months.

JetBlue shares soared earlier this month, after the company raised its fourth quarter earnings estimates. That was due to strong customer demand in November and December and to falling fuel prices, which will limit costs. JetBlue is axing many of its unprofitable routes.

Morgan Stanley analysts praise JetBlue’s strategy. “We believe it is simple yet ambitious,” they write. They are impressed with its ability to deal with challenges like the failed merger with Spirit Airlines.

• Southwest (NYSE: LUV). Stock up 14% last six months.

Southwest reached an agreement with Elliott Investment Management in October, ending the activist investor’s proxy fight. That took away a big question mark for the stock. Profit slid in the third quarter, but far exceeded analyst expectations.

The company forecast unit revenue will climb 3.5% to 5.5% in the fourth quarter but that costs, excluding fuel, will increase 13%. 

Southwest too reported strong holiday bookings. Owens sees the airline reducing future capacity growth and thus operating costs, while increasing revenue yield.

• United Airlines (NYSE: UAL). Stock up 89% last six months.

United Airlines stock soared nearly 13% the day after it reported strong third-quarter earnings in October. It expects adjusted earnings per share to climb 25% to 33% in the fourth quarter. The company announced a $1.5 billion share buyback in October, its first since the pandemic.

Owens offers a mixed prognosis for United. “Even after giving it credit for increasing its share of the industry’s profitable traffic, its structural unit costs continue to rise,” he says.