Air travel demand spiked after the reopening of the economy. However, higher airfares resulting from strong demand, elevated fuel prices, and increased labor costs due to staffing challenges, are now impacting customers’ travel plans. According to Adobe Insights, U.S. domestic flight online bookings declined 2.3% in May on a monthly basis due to increased airfares, although they continued to be above pre-pandemic levels.
This was the second consecutive month of sequential decline in domestic online bookings. It should be noted that despite a drop in the number of bookings, the dollar amount spent on online bookings in May was up due to higher fares.
Further, Adobe Insights’ report highlighted that higher air ticket prices are beginning to impact summer plans (trips between June-August 2022), with domestic bookings down 2% (through the end of May) compared to pre-pandemic levels.
Meanwhile, airlines welcomed the Biden administration’s recent decision to lift the COVID-19 testing requirement for inbound international travelers.
With that in mind, using the TipRanks Stock Comparison tool, we stacked up American Airlines, Delta Airlines, and Southwest Airlines against each other to pick the more attractive airline stock as per Wall Street analysts.
American Airlines (NASDAQ: AAL)
Earlier this month, American Airlines raised its second-quarter revenue growth outlook to the range of 11% to 13%, from the prior outlook of 6% to 8%. The company cited continued strength in the demand and pricing environment.
However, investors were still disappointed as the company raised its estimates for expected fuel costs and Cost per available seat mile or CASM (excluding fuel and net special items). However, American Airlines reassured that it expects solid revenue growth to more than offset the increased costs.
This week, Barclays analyst Brandon Oglenski lowered his price target on American Airlines to $17 from $20 and reiterated a Sell rating. While American is poised to benefit from a continued travel recovery this year, Oglenski feels that rising interest rates and the company’s high financial leverage will likely limit the stock’s upside from current levels.
Overall, the Street is sidelined on the stock, with a Hold consensus rating based on two Buys, six Holds, and four Sells. The average American Airlines price target of $19.19 implies 44.39% upside potential from current levels.
Delta Air Lines (NYSE: DAL)
Like American Airlines, Delta also raised its second-quarter revenue guidance, thanks to robust demand and higher ticket prices across consumer, business, and international travel. The company expects its Q2 adjusted revenue fully restored to pre-pandemic levels. It also anticipates Q2 operating margin of 13% to 14% despite lower capacity, higher fuel prices, and increased non-fuel costs.
Goldman Sachs analyst Catherine O’Brien upped her price target on Delta to $45 from $44 and maintained a Hold rating after the company’s update indicated better-than-expected revenue trends, with Q2 unit revenue expected to be up about 21.5%. O’Brien raised her Q2 EPS estimate to $1.85 from $1.65.
Earlier, Delta’s strong Q1 results had prompted Oglenski to upgrade the stock to a Buy from Hold with a price target of $60, stating, “Delta’s focus on brand, premium products, and prudent balance sheet management has favorably positioned the carrier to meaningfully profit from the current strong rebound in US travel demand.”
Overall, Delta scores a Strong Buy consensus rating based on 12 Buys and one Hold. The average Delta price target of $53.27 implies 66.78% upside potential in the 12 months ahead.
Southwest Airlines (NYSE: LUV)
Low-cost carrier Southwest is also optimistic about its second-quarter business, which reflects in the updated revenue guidance of 12% to 15%. The company earlier expected 8% to 12% top-line growth. Southwest expects continued passenger yield strength to more than offset the rise in its fuel price estimate.
At the time when Southwest updated its Q2 outlook last month, the company stated that it continues to experience strong load factors (a measure that indicates capacity utilization) and accelerated summer travel bookings.
Following the company’s Q2 guidance update, Bank of America Securities analyst Andrew Didora reiterated a Buy rating and a price target of $60.
Didora noted that Southwest’s Q2 update continues to show that it is “set up well for positive earnings revisions given its fuel hedge (63% for 2022), steady cost results vs expectations, and its able to price with the industry.”
All in all, the Street is cautiously optimistic on the stock, with a Moderate Buy consensus rating based on nine Buys, five Holds, and one Sell. The average Southwest price target of $54.20 implies 45.64% upside potential from current levels.
Conclusion
In the days ahead, high inflation and an impending recession could hurt the strong recovery that major airlines are experiencing, though many carriers expect to offset higher costs with increased airfares.
Currently, analysts are more bullish about Delta Air Lines than American Airlines and Southwest based on its solid execution and strong fundamentals. Also, Wall Street analysts predict a higher upside potential for Delta stock compared to the other two.
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