By Callum Keown
Things are about to start looking up for U.S. airlines and investors should consider buying four stocks in particular — Delta Air Lines, American Airlines, Southwest Airlines, and Alaska Air Group.
That’s the view of UBS analysts as they initiated coverage of the airline sector in a note late Tuesday. They see the intense cost pressures facing the industry beginning to moderate later in the year and margins moving higher in late 2024 and into 2025.
“The market will recalibrate its 2025 profit estimates higher as there is growing evidence of cost pressures bottoming later this year and unit revenues (revenue per available seat mile) increasing from here,” analysts led by Atul Maheswari wrote. “Plus, demand is likely to hold firm amid a stable economic backdrop and a return of business travel,” they added.
But those factors will only drive select airline stocks higher, the analysts noted — initiating Sell ratings on JetBlue Airways and Allegiant Travel and Neutral ratings on United Airlines and Frontier Group.
JetBlue has “unique headwinds,” they noted, including its exposure to engine problems affecting several Airbus jets, and the upcoming renewal of its pilot pay contract in early 2025. Allegiant is unlikely to benefit from an improving fare backdrop, they said, adding that capacity cuts will drive higher unit revenue for its peers but not Allegiant as 75% of its routes are noncompetitive.
UBS analysts see the biggest upside for Alaska Air stock, issuing a target price of $54 — implying a 43% upside to Tuesday’s closing price. The stock has underperformed the U.S. Global JETS exchange-traded fund by around 15% since its proposed merger with Hawaiian Airlines was announced, which has created a “compelling entry point” for the shares. It can also benefit from easing cost pressures, improving unit revenue, and an acceleration in business travel, they added.
Their price target of $59 on Delta implies a 35% upside to Tuesday’s price, as they said the airline’s unit revenue will surprise the market later in the year. “We recommend buying the stock now in advance of this upcoming multi-quarter period of margin expansion beginning in the second half of this year.”
For Southwest, the UBS analysts see a multi-quarter period of profit recovery unfolding later this year as the airline’s network-optimization strategy begins to take effect and drives flight occupancy higher. They have a price target of $36 on the stock, a 28% upside to Tuesday’s price.
American is also rated buy, reflecting strong free cash flow generation and profit acceleration in the next two to three years, they said. The renegotiation of American’s 10-year-old co-branded card program is a “unique near-term catalyst,” which should drive an acceleration in high-margin loyalty income. The analysts have a target price of $19 on the stock, a 36% increase on Tuesday’s price.
Write to Callum Keown at callum.keown@barrons.com