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Since the COVID-19 fallout in 2020, airlines have been on the runway to recovery. In 2022, air traffic numbers finally recovered fully to 2019 pre-pandemic numbers, according to the FAA. Thus far in March, TSA checkpoint numbers are showing 2023 not only surpassing 2022, but also taking out 2019 numbers. As more employees enjoy flexible remote work, business travel recovers, and vacationers make up for lost time, the airline industry’s turbulent times may be in the rearview mirror, and years of growth may be ahead. With that said, not all airlines are created equally. Today, we will break down three segments of the airline industry:
Large Domestic Carriers
In January, Zacks Rank #2 (Buy) United Airlines (UAL - Free Report) handily beat earnings estimates. Zacks Consensus Estimates expected EPS of 2.07, and UAL delivered EPS of $2.46.
Image Source: Zacks Investment Research
UAL’s revenue also jumped by a healthy 51% as air traffic picked up. UAL’s healthy top-line growth can also be attributed to its fast growing cargo operations business. Cargo revenues increased an impressive 84.1% in 2022 versus pre pandemic levels.
Judging by UAL’s historical earnings price and earnings relationship, the stock has a lot left in the tank. If UAL’s earnings trajectory follows consensus estimates for the next year, a conservative price target would be $80 a share by year-end based on the chart below:
Image Source: Zacks Investment Research
Fellow Zacks Rank #2 (Buy) stock American Airlines (AAL - Free Report) is on a similar growth path as United. Like United, American Airlines benefits from the continued recovery in air travel demand, a growing offering of travel destinations, and management’s debt reduction efforts. Zacks Rank #3 (Hold) Delta Airlines (DAL) is another large domestic carrier worth watching. However, from an estimate perspective, UAL remains the most attractive name in this segment.
Small Domestic Carriers
Zacks Rank #5 (Strong Sell) Southwest Airlines (LUV) has been drastically underperforming its peers. While United Airlines is up 70% over the past year, Southwest’s stock is lower by 8%.
Image Source: Zacks Investment Research
Southwest’s performance has been negatively impacted by rising fuel costs, massive flight cancellations, and a rise in labor costs (and a labor dispute). These issues have led to a return on equity (ROE) of just 6.7% - well below that of the S&P 500 Index and a signal that the company is poorly managed and inefficient. While the larger carriers have to contend with these same issues, the impact is being felt more by the smaller carriers. Another low-cost carrier, Zacks Rank #3 (Hold) Spirit Airlines (SAVE - Free Report) , is encountering similar issues regarding its inability to absorb higher fuel costs.
Small Foreign Carriers
Thus far in 2023, foreign carriers such as Zacks Rank #1 (Strong Buy) Ryanair Holdings (RYAAY - Free Report) have outperformed. Ryanair, known for its cheap flights around Europe, is experiencing robust demand. Despite the strong price action in the stock, management does not seem content. RYAAY is purchasing more than 200 Boeing (BA - Free Report) Max jets to expand its fleet. Shares of RYAAY are attempting to break out over $100. If the stock can clear the psychologically important level, it opens the door to $120 by year end.
Image Source: Zacks Investment Research
Perhaps no other airline has handled the many challenges thrown at the industry as well as Zacks Rank #1 (Strong Buy) Copa Airlines (CPA - Free Report) . For example, while most airlines were unprofitable in 2020 and 2021 after the pandemic shock, Copa was back in the green by 2021. While rising fuel costs remain a headwind, CPA’s prudent cost-management efforts are paying off. In the most recent reported quarter, passenger servicing and maintenance costs each dropped by more than 20%. CPA shares continue to ride the rising 50-day moving average and are set to move higher.
Image Source: Zacks Investment Research
Takeaway
The Zacks Transportation – Airline Industry is one of the strongest industries tracked by Zacks. The strength in airlines can be attributed to a resurgence in air traffic which is driving earnings higher. Because the industry is in the top 26% of all industries, investors should expect airlines to outperform over the next 12 months. However, not all airline stocks deserve your attention. Stick to large U.S.-based carriers or smaller foreign carriers as opposed to small domestic carriers, which are feeling the impact of rising fuel costs.
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Breaking Down 3 Airline Segments (Avoid 1)
The Resurgence of Air Travel
Since the COVID-19 fallout in 2020, airlines have been on the runway to recovery. In 2022, air traffic numbers finally recovered fully to 2019 pre-pandemic numbers, according to the FAA. Thus far in March, TSA checkpoint numbers are showing 2023 not only surpassing 2022, but also taking out 2019 numbers. As more employees enjoy flexible remote work, business travel recovers, and vacationers make up for lost time, the airline industry’s turbulent times may be in the rearview mirror, and years of growth may be ahead. With that said, not all airlines are created equally. Today, we will break down three segments of the airline industry:
Large Domestic Carriers
In January, Zacks Rank #2 (Buy) United Airlines (UAL - Free Report) handily beat earnings estimates. Zacks Consensus Estimates expected EPS of 2.07, and UAL delivered EPS of $2.46.
Image Source: Zacks Investment Research
UAL’s revenue also jumped by a healthy 51% as air traffic picked up. UAL’s healthy top-line growth can also be attributed to its fast growing cargo operations business. Cargo revenues increased an impressive 84.1% in 2022 versus pre pandemic levels.
Judging by UAL’s historical earnings price and earnings relationship, the stock has a lot left in the tank. If UAL’s earnings trajectory follows consensus estimates for the next year, a conservative price target would be $80 a share by year-end based on the chart below:
Image Source: Zacks Investment Research
Fellow Zacks Rank #2 (Buy) stock American Airlines (AAL - Free Report) is on a similar growth path as United. Like United, American Airlines benefits from the continued recovery in air travel demand, a growing offering of travel destinations, and management’s debt reduction efforts. Zacks Rank #3 (Hold) Delta Airlines (DAL) is another large domestic carrier worth watching. However, from an estimate perspective, UAL remains the most attractive name in this segment.
Small Domestic Carriers
Zacks Rank #5 (Strong Sell) Southwest Airlines (LUV) has been drastically underperforming its peers. While United Airlines is up 70% over the past year, Southwest’s stock is lower by 8%.
Image Source: Zacks Investment Research
Southwest’s performance has been negatively impacted by rising fuel costs, massive flight cancellations, and a rise in labor costs (and a labor dispute). These issues have led to a return on equity (ROE) of just 6.7% - well below that of the S&P 500 Index and a signal that the company is poorly managed and inefficient. While the larger carriers have to contend with these same issues, the impact is being felt more by the smaller carriers. Another low-cost carrier, Zacks Rank #3 (Hold) Spirit Airlines (SAVE - Free Report) , is encountering similar issues regarding its inability to absorb higher fuel costs.
Small Foreign Carriers
Thus far in 2023, foreign carriers such as Zacks Rank #1 (Strong Buy) Ryanair Holdings (RYAAY - Free Report) have outperformed. Ryanair, known for its cheap flights around Europe, is experiencing robust demand. Despite the strong price action in the stock, management does not seem content. RYAAY is purchasing more than 200 Boeing (BA - Free Report) Max jets to expand its fleet. Shares of RYAAY are attempting to break out over $100. If the stock can clear the psychologically important level, it opens the door to $120 by year end.
Image Source: Zacks Investment Research
Perhaps no other airline has handled the many challenges thrown at the industry as well as Zacks Rank #1 (Strong Buy) Copa Airlines (CPA - Free Report) . For example, while most airlines were unprofitable in 2020 and 2021 after the pandemic shock, Copa was back in the green by 2021. While rising fuel costs remain a headwind, CPA’s prudent cost-management efforts are paying off. In the most recent reported quarter, passenger servicing and maintenance costs each dropped by more than 20%. CPA shares continue to ride the rising 50-day moving average and are set to move higher.
Image Source: Zacks Investment Research
Takeaway
The Zacks Transportation – Airline Industry is one of the strongest industries tracked by Zacks. The strength in airlines can be attributed to a resurgence in air traffic which is driving earnings higher. Because the industry is in the top 26% of all industries, investors should expect airlines to outperform over the next 12 months. However, not all airline stocks deserve your attention. Stick to large U.S.-based carriers or smaller foreign carriers as opposed to small domestic carriers, which are feeling the impact of rising fuel costs.