Do we finally have blue skies ahead for airline stocks? It’s too early to sound the all-clear, but things are certainly looking up. The announcement of the Pfizer (NYSE:PFE) vaccine breakthrough last week set off a seismic shift in the stock market. Traders started to dump their tech and work-from-home stocks while buying out-of-favor airlines, cruise companies, restaurants, retailers and other pandemic-recovery shares.
And that makes a ton of sense. Since then, we’ve heard even more positive news. For example, the Moderna (NASDAQ:MRNA) vaccine also delivered excellent results in clinical trials, giving the world a safety net if anything goes wrong with the Pfizer candidate.
As such, we can hopefully start looking forward to a post-pandemic world once and for all.
So, with the aviation and aerospace sectors on the mend, traders can start making moves in these names. Here are the outlooks for seven leading airline stocks:
- United Airlines (NASDAQ:UAL)
- Southwest Airlines (NYSE:LUV)
- American Airlines (NASDAQ:AAL)
- Delta Airlines (NYSE:DAL)
- Hawaiian Airlines (NASDAQ:HA)
- Volaris (NYSE:VLRS)
- Copa Airlines (NYSE:CPA)
Airline Stocks to Buy: United Airlines (UAL)
United Airlines finds itself in a middle ground, as far as the major U.S. carriers go. It’s in a much better financial situation than American, ensuring that it has some flexibility. However, its situation is more precarious than either that of Southwest or Delta. As a result, UAL stock is potentially the most intriguing of the four big airline stocks. It has a wide range of potential outcomes — from very good all the way through a near wipe-out.
So far, things appear to be going reasonably well for United, however. That said, analysts expect United Airlines to lose $26.50 per share in earnings in 2020. That’s not a misprint — the company is set to lose something along the order of $7 billion or $8 billion for the year. Analysts expect another sizable loss for 2021 as well, something in the range of a little over $4 per share.
Considering that UAL stock started the year at $90 — before there was any pandemic — and has lost $30 or so outright from its negative earnings, it’d be highly unlikely that the stock would go back over $60 a share anytime soon. Factor in some longer-term loss of demand — and the negative effects of United’s capital raises this year — and the market price makes sense now.
If UAL stock was worth $90 before, it’s probably not worth more than $40 or $50 per share now. Therefore, shares seem pretty fairly priced at the moment.
Southwest Airlines (LUV)
In 1978, the government deregulated the airline industry. That allowed airlines to compete directly on price and launch competitive fare and market share wars against each other. It also allowed formerly regional airlines like Southwest to compete on a national level. This deregulation was devastating for most airline carriers — in fact, all but one of the country’s significant airlines went bankrupt subsequently.
The one exception? Southwest Airlines. Incredibly enough, LUV stock has produced a total return of around 36,000% since deregulation was enacted in 1978. That’s a pretty great figure for a company in such an historically challenged industry.
Southwest’s prior superior returns were built on a few key distinct edges. For a long time, the company had best-in-class fuel hedges, insulating it from the high oil prices that crushed other airlines between 2007 and 2012. The firm also had a much lower cost base than other airlines as it avoided high cost unionized labor contracts and expensive big city airports.
In recent years, many of Southwest’s old advantages have eroded, though. The firm is no longer a scrappy upstart but instead one of the big dogs. As such, its ability to operate distinctly has slipped a degree. In other words, don’t expect LUV stock to be the massive winner it used to be.
Still — with a best-in-industry balance sheet and astute management — Southwest is a fine choice for investors seeking a safe holding among otherwise volatile airline stocks.
Delta Airlines (DAL)
Of the big three legacy carriers, Delta entered 2020 with by far the best financial position. This has given the company a ton of flexibility in dealing with the pandemic. DAL has avoided engaging in the level of dilution and asset sales that other major carriers have had to endure.
Additionally, Delta’s losses have been a smaller proportion of its prior valuation. To put some numbers on that, DAL stock traded around $60 heading into 2020. Now, analysts expect it to lose just over $10 per share for this year — a far better ratio than United. All that is to say that Delta has seen a much smaller impairment of its pre-pandemic value than its rivals.
Currently, Delta stock largely reflects this advantaged position — its shares are only down about 36% for the year. As the safest play of the three major legacy airlines, DAL stock is a reasonable pick here. Assuming that air travel picks up steam again early next year, the stock could make it back to the $50 mark over the next few months. That makes it one of the more promising airline stocks.
American Airlines (AAL)
Next on my list of airline stocks is American Airlines, which had a terrible 2020. Heading into the pandemic, the company was arguably the most aggressive of the major airlines. It took on tens of billions of dollars of debt in large part to buy back more of its own stock.
It appears American believed that the airline industry had overcome its previous problems and would be profitable forevermore. Back in 2017, CEO Dough Parker said while discussing airlines, “The old world was darkness, but now it’s light […] I know I sound like an evangelist talking about this.” He continued, “I don’t think we’re ever going to lose money again.”
Of course, that faith was misguided. And because American spent so heavily on share buybacks and other unnecessary expenses, it entered the pandemic with the most debt out of all the major carriers.
As a result, American has had to dilute shareholders massively to raise cash and keep the lights on. And as its losses keep piling up, the company will be forced to issue even more shares and high-yield debt. That will keep a lid on the price of AAL stock.
Hawaiian Airlines (HA)
While Hawaiian Airlines isn’t the most well-known American carrier, it did stand out from the other airline stocks this past week.
Last Monday — the day the Pfizer vaccine news hit — HA stock was the single biggest gainer out of its sector. Shares soared more than 50%. HA stock’s ability to surge that much in value in one day speaks to both the risk and opportunity bound up in the regional carrier.
What makes Hawaiian Airlines unique? Namely, the company is a heavy play on tourism. According to Hawaii’s state government, the state has suffered far worse than the national economy overall. Analysts see Hawaii’s economy shrinking 12.3% for full-year 2020. That’s far worse than the 5% contraction the U.S. economy is expected to face for the year.
The reason for Hawaii’s striking underperformance isn’t hard to identify — Hawaii’s tourism arrivals plummeted 98.8% in the second quarter year-over-year (YOY). Missing tourists meant missing ticket sales for Hawaiian Airlines. Furthermore, the collapse of the tourism industry has dealt a crushing blow to Hawaii’s local businesses overall.
But the good news is that while Hawaii is among the hardest-hit states, it could be poised for a huge comeback. Assuming the vaccine is successful and widely available soon, the company’s shares could mount a breath-taking recovery. Already, the Hawaii state government has lifted its former mandatory 14-day self-quarantine for passengers arriving on the islands. And Hawaiian Airlines still had $979 million in cash as of the last earnings report.
Combine these factors and Hawaiian Airlines should have enough runway to last until tourism springs back to life in 2021.
Volaris (VLRS)
Another pick of the airline stocks that investors should consider is Mexican hyper-discounter Volaris. The company is attractive for several reasons when compared against much of its United States-based competition.
For one, Volaris has a much lower cost base as it pays many of its expenses in Mexican Pesos rather than U.S. Dollars — for instance, the wage difference between a pilot based in Mexico City versus New York City can be considerable. More broadly, the company is run with an ultra-low-cost structure. It has a lean streamlined flight offering with minimal frills.
This means that, historically, Volaris has had more correlation to the price of oil than other airlines. That’s because jet fuel is proportionally a much larger chunk of Volaris’ cost base. Therefore — given the current economic tailspin — the airline is benefiting more than its competitors. The cost of jet fuel has plummeted and that matters much more to Volaris’ bottom line than rival airlines that have overhead in other areas.
Further, Mexico’s aviation business is already roaring back. Based on the numbers filed by three of Mexico’s publicly traded airport operators — ASUR, PAC and OMA — traffic is now back to 55% of normal levels. This is far ahead of what we’re seeing in the U.S. and Europe. Volaris itself is back to 82% of normal traffic levels, absorbing passengers from struggling competitors.
Mexico had a huge Covid-19 wave this summer, but it faded quickly. As a result, it has been able to get back to something like normal much faster than the rest of North America. The country has already had its international borders and tourism sector open for months now. This should benefit Volaris greatly in the coming months. VLRS stock has already run up a bunch in recent weeks, but it’s one to consider buying on pullbacks.
Copa Airlines (CPA)
Sticking with Latin America, the last pick on my list of airline stocks is Copa, the main airline of Panama. While Panama itself is a small market, Copa has an extensive hub and spoke system running from the United States far into South America through the centrally located Panama City airport. And — for what it’s worth — CPA has historically outperformed most of its peers, both in North America and Latin America.
Part of this is due to specific competitive advantages. For example, there’s no major rival airline in most of Central America. That has allowed Copa to charge unusually high fares on short routes in and around its core Panama City airport. More broadly, management has also avoided the temptation to grow too quickly, avoiding the empire-building that felled now-bankrupt rivals Latam (OTCMKTS:LTMAQ) and Avianca (OTCMKTS:AVHOQ). These fundamental strengths should help CPA stock continue its recovery going forward.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.