Time to Get on Board the Airlines?

The negatives about airlines are well known -- rising oil prices, recession fears, understaffing and continued pandemic worries. High seat prices and flight cancellations only add to consumer dismay. Nevertheless, several leading investment experts, and contributors to MoneyShow.com, look past the near-term troubles and focus on the sector's long-term runway for growth. Colin Scarola, CFRA Research's The Outlook Despite capacity constraints and surging inflation, particularly in fuel prices, U.S. airlines recently reported that their earnings recoveries have accelerated in the second quarter. Positive guidance revisions notwithstanding, airline shares have plummeted during Q2. Stock values going down while near-term earnings forecasts rise indicates investors are expecting a severe drop-off in airline revenues and earnings after an initial pent-up demand boom. Declining real earnings for U.S. households is certainly a negative factor for future airline earnings, but this is only one piece of the story. And when considering other key factors that will influence travel spending and fuel prices during the remainder of 2022 and 2023, we think many U.S. airlines will continue to generate profit growth through 2023, justifying much higher stock prices. A key reason for our positive airline view is that, despite declining real earnings, U.S. household bank accounts are about 4x larger than pre-pandemic. So, while real household earnings may be on the decline, the pandemic era surge in household bank accounts is likely softening the blow, making consumers more comfortable with spending greater amounts on travel. Many households may also pull back on durable goods spending over the next year or two after the pandemic stay-at-home boom, freeing up significant cash for travel in 2022-2023. Having spent more than usual on home items over the past two years, we think it's reasonable to expect many households will redirect some money normally spent in this category to travel over the next several years. Overall, we think the 20%-plus selloff in airline stocks since April is generally a good buying opportunity, as we expect the firms will continue their recovery back to pre-pandemic earnings levels during 2022-2023. Meanwhile, there are three stocks in the airlines sector that earn our highest strong buy rating of 5-STARS: Delta Air Lines , with a target of $55; Southwest Airlines , with a target of $64; and United Airlines Holdings , with a target of $63. Frank Holmes, US Global's Investor Alert Airlines and airports are bracing for what is expected to be a particularly busy three months. A couple of airlines, in fact, upgraded their second-quarter revenue projections, citing higher-than-expected demand. That comes despite higher fuel prices, which should be more than offset by increased revenues. Here are three airline stocks I'm keeping my eye on as we head into the busy summer leisure travel season. Southwest Airlines I'll just say up front, Southwest has long been one of my favorite domestic carriers. As the original low-cost, no-frills airliner, it's had decades' worth of experience operating at the intersection of comfort and affordability. There's much more to love about Southwest -- the company has the number one position in 23 of the top 50 markets in the U.S., and the focus right now is on restoring the network to pre-pandemic levels -- something that could be achieved by 2023, if not sooner. Southwest is also focused on maintaining its low-cost advantage. This includes coming up with more efficient flight plans, optimizing maintenance planning and modernizing its revenue management system. All combined, these initiatives are expected to add between $1.0 billion and $1.5 billion to earnings before interest and taxes (EBIT) by 2023. Rising jet fuel prices are a concern, but the good news is that Southwest is approximately 64% hedged for the rest of this year at around $60 per barrel. This puts the company in a better position than many of its larger peers. Alaska Airlines The more I learn about Alaska, the more I find it attractive. Right now, the company appears to have the best balance sheet in the industry with a 49% debt-to-capitalization ratio. Since the start of the pandemic, Alaska was the first airline to reach no cash burn, the first to become cash flow positive and the first to become profitable. As the number five U.S. carrier by fleet size and passenger numbers, Alaska is moving toward a low-cost structure that should match Southwest's this year or next. The airline has regularly outperformed the domestic industry on operating margin over the past 20 years. In 2016, Alaska merged with Virgin America with the goal of becoming the premiere West Coast carrier. Today its market share in key hubs continues to rise, including in Seattle, Portland, Anchorage, San Francisco and Los Angeles. Unlike other airliners, Alaska is working toward having a single-type fleet, which should lead to millions in cost savings in aircraft swaps, maintenance and reduced pilot training. Similar to Southwest, Alaska hedges its fuel costs. Half of its fuel requirements are hedged until the end of this year at a cost of $71 per barrel. Ryanair Holdings Now for something a little different, let's jump across the Atlantic to Ireland, where ultra-low-cost carrier Ryanair is headquartered. The largest airline in Europe, with flights to nearly 40 destination countries, Ryanair is well-positioned to capture an increase in leisure travel demand as Europe drops its Covid-related measures and restrictions. To give you an idea of just how busy Europe may be this summer, the European airspace manager EUROCONTROL recently said it expects traffic in the upcoming months to stand at 90% of pre-pandemic levels. This could be a huge boon for Ryanair, which reported an average of 2,815 flights per day in April. Ryanair has been a leader in attracting climate-conscious customers, something that's increasingly important in the European market. In June last year, the company took delivery of the Boeing 737-8200 Gamechanger aircraft, which purports to reduce fuel consumption by 16% per seat. As of March 2022, Ryanair has taken delivery of 61 of these aircraft and reportedly plans to increase this by an additional 70 within the year. Adam Johnson, Bullseye Brief I have been waiting to buy my favorite airline at the right price. Plunging markets amid surging fear provide opportunity at last. Delta Air Lines, Inc. is the strongest full-service U.S. operator (highest margins, most innovative, best balance sheet), and the only airline I've ever owned. I have made money in DAL three times since 2019, and I'm trying for a fourth. I will buy shares under $33, an area which provided support last March and previously in 2020. While airlines are a notoriously tricky business, Delta CEO Ed Bastian is an exceptional leader Before Covid, Delta was the industry's most profitable airline, and since Covid, the company has fortified its balance sheet with the most amount of cash. Delta's operating metrics consistently beat peers, which is why it's the only airline I have ever owned. Delta owns a 185 Mb/d oil refinery outside Philadelphia, the only airline in the world which has chosen to hedge fuel cost exposure by owning energy producing assets. The refinery is profitable and accounts for 16% of Delta revenue. This year its income has proven highly effective at offsetting high jet fuel prices. Delta is first-class operator, and my top pick as travel returns. My target is intuitive and achievable. I simply apply the long-term P/E multiple of 9.2x from before Covid to estimated 2024 earnings of $7.73, 10% above 2019 to reflect rebounding demand and profitability gains from a newer fleet. I then discount back to the present at 4% which leads to a price target of $68. Aristofanis Papadatos, Sure Dividend Investors should also be aware that all the airlines discussed below have suspended their dividends since early 2020 due to the impact of the pandemic on their business. However, the airline industry has begun to recover from this crisis. Hawaiian Holdings is the largest air carrier in Hawaii, transferring about 12 million passengers per year under normal business conditions. Hawaiian enjoys a meaningful competitive advantage, namely its dominant position in Hawaii. Thanks to this advantage, the airline has enjoyed premium fares compared to the fares of the West Coast. However, Hawaiian is somewhat more vulnerable to downturns than its peers due to its lack of diversification and its tie to tourist traffic. This helps explain the excessive aggregate losses per share of -$19.51 in 2020-2021. Given the high net debt of $2.3 billion, which is nearly triple the market capitalization of the stock, Hawaiian will be highly vulnerable in the event of a prolonged downturn. Due to the challenges facing Hawaiian, we assume a fair price-to-earnings ratio of 7 for the stock. In addition, we expect the company to earn approximately $4 per share by 2027. As a result, we expect the stock to trade around $28 by 2027 and thus offer a 12.6% average annual return over the next five years. American Airlines is the world's largest airline in revenue and fleet size, with thousands of daily flights to more than 365 destinations in 61 countries. The airline has a more volatile performance record than its peers, primarily due to its high sensitivity to fuel costs, as the company does not hedge its fuel cost. Moreover, American Airlines has been caught in the ongoing coronavirus crisis off-guard, with an excessive debt pile. Net debt has climbed from $54.4 billion to $62.3 billion. This is nearly 6 times the market cap of the stock and hence it is undoubtedly excessive. The company has posted negative free cash flows in each of the last five years, partly due to its high capital expenses. These factors render the stock by far the riskiest in its peer group in the ongoing downturn of the aviation industry. On the other hand, leverage is a double-edged sword. This means that American Airlines is an ideal stock for those who are confident in a sustained, multi-year recovery of the aviation industry. As we expect American Airlines to post a loss this year, we have used a mid-cycle level of earnings per share of $3.50 for our calculations. Given the high debt load of the company, we assume a fair price-to-earnings ratio of 6. We believe the stock can offer a 13.7% average annual return over the next five years, but we note that such a high return will materialize only in the absence of another downturn. United Airlines Holdings owns United Airlines and Continental Airlines; it introduced 93 new routes in 2018, more than any other U.S. airline. Thanks to its strategy, United generates a much higher portion of its revenues from international flights than its peers. Due to its international exposure, the company is somewhat more exposed than its peers, as international flights have been hit harder than domestic flights so far. In the first quarter of 2022, its revenue was 19% lower than the pre-pandemic level and thus the company incurred a loss per share of $4.24. However, United has provided remarkably positive guidance for the second quarter. Management stated that it currently observes the greatest recovery in demand in the last 30 years and thus it expects a strong profit in the second quarter. Unfortunately, United has a high debt load, with net debt of $44.7 billion, which is more than triple the market cap of the stock. If the airline enjoys a sustained recovery from the pandemic, it will easily service its debt. On the other hand, it will be vulnerable if it faces another near-term downturn. Due to the high debt load, we assume a fair price-to-earnings ratio of 7 for the stock. In addition, we expect the company to earn approximately $12 per share by 2027. As a result, we expect the stock to trade around $84 by 2027 and thus offer a 14.3% average annual return over the next five years.

Time to Get on Board the Airlines?

Several investment experts look beyond near-term turbulence and focus on the sector's long-term runway for growth.

Columnist Conversation

8 Trading Rules from T. T. Hoyne

This Weekend on Real Money

Classic Trading Rules From Bernard Baruch

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.