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3 Airline Stocks to Take a Stake in Amid Upbeat Travel Demand

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Air-travel demand, which was poorly hit by the pandemic gloom, is gradually returning to pre-COVID levels. This has been possible of late with the gradual resumption of economic activities as pandemic-related restrictions are relaxed. Administered with jabs, which act as a safety net, more and more people are taking to the skies. The increased passenger volumes are augmenting passenger revenues, which took a severe beating when the pandemic peaked. The northward movement in passenger revenues is certainly a very positive development for the airlines as passenger revenues account for most of their top lines. 

Like most other parts of the world, increased passenger revenues are boosting airlines in the United States. Also, air-travel demand (mainly for leisure) picks up. This much-upbeat scenario is clear from the fact that passenger revenues in the recently concluded first-quarter 2022 earnings season improved massively (on a year-over-year basis), leading to more than 100% surge in total revenues for key U.S. airline players like Delta Air Lines (DAL - Free Report) , Southwest Airlines (LUV - Free Report) and Alaska Air Group (ALK - Free Report) .

The situation is likely to get rosier with air-travel demand expected to accelerate in the summer season. In fact, the warmer months this year are predicted to be the busiest travel season since the start of the pandemic. Airlines are likely to benefit hugely from this pent-up demand. The surrounding bullishness and brighter prospects make DAL, LUV and ALK attractive investment options. The possibility of expensive ticket prices, mainly due to the upsurge in fuel costs, is unlikely to deter Americans from resorting to air-travel as cash on hand is expanding.

Highlighting the sunny scenario, another U.S. airline heavyweight United Airlines (UAL - Free Report) recently provided an improved unit revenue projection for the June quarter. In an SEC filing dated May 16, UAL’s management projected total revenue per available seat miles (TRASM: a measure of unit revenue) for second-quarter 2022 to increase in the 23-25% band from the second-quarter 2019 actuals.

Per the previous TRASM forecast, given last month while releasing first-quarter 2022 results, the metric was expected to increase roughly 17% from the second-quarter 2019 actuals. The uptick in bookings, mainly for leisure, led to this optimistic guidance. Second-quarter capacity at UAL is projected to decline roughly 14% from the second-quarter 2019 levels.  Owing to a likely better traffic scenario, load factor (% of seats filled by passengers) will probably increase from the second-quarter 2019 reading. Adjusted operating margin is still expected to be around 10%.

The upturn in air-travel demand can be gauged from the data provided by the Transportation Security Administration (TSA). Notably, the number of passengers who passed through the TSA checkpoints recently were well above the year-ago levels. In fact, on May 22, 2,350,927 passengers passed through the TSA checkpoints, higher than the 2,070,716 figure recorded on May 22, 2019 (pre-pandemic levels).

Our Airline Picks

Reckoning the current positive environment and better possibilities in store, we note that the aviation stocks should grace one’s portfolio at the moment. Below we present three stocks that are sound investment options, each carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Delta Air Lines: Improved air-travel demand, particularly on the domestic front, is aiding Delta. Anticipating travel-demand to increase further, DAL provided a bullish outlook for the second quarter. DAL expects revenue recovery to accelerate to 93-97% in the second quarter, with unit revenues likely to rise in double digits from the second-quarter 2019 tally.

Delta expects to generate a strong free cash flow in the June quarter. DAL currently sports a Zacks Rank #1. The positivity surrounding the stock is evident from the fact that the Zacks Consensus Estimate for current-year earnings has surged 71.6% over the past 60 days. DAL has a Growth Style Score of B.

Southwest Airlines: Continued recovery in air-travel demand bodes well for LUV. Anticipating a steady improvement in bookings, the carrier expects to reap profits in the remaining three quarters of 2022 as well as for the full year. LUV's management predicts operating revenues to increase 8-12% in the second quarter of 2022 from the comparable period’s level in 2019. LUV is seeing strong bookings for spring and summer travel. 

Southwest Airlines currently sports a Zacks Rank of 1. The positivity surrounding the stock is evident from the fact that the Zacks Consensus Estimate for current-year earnings has skyrocketed in excess of 100% over the past 60 days. Like DAL, LUV too has a Growth Style Score of B.

Our final pick is Alaska Air. Like DAL and LUV, ALK expects the air-travel demand scene to get brighter with the summer fast approaching. ALK’s management predicts a double-digit percentage increase in yield, unit revenues and pre-tax margin in the June quarter from the second-quarter 2019 actuals. Moreover, driven by high passenger revenues, ALK expects to reap profits from the second quarter onward through 2022. 

Alaska Air currently carries a Zacks Rank #2. The air of optimism surrounding the stock is evident from the Zacks Consensus Estimate for current-year earnings being revised 38% upward over the past 60 days. ALK has a Growth Style Score of A.