Will Airline Stocks Fly High Next Year?

Airline companies are not exactly flying high this year. Airline stocks including Alaska Air Group (ALK), Jet Blue Airways (JBLU), Delta Airlines (DAL), and United Airlines Holdings (UAL) have fallen sharply this year. ALK and DAL are down by more than 15% each, with JBLU dropping by more than 50% while UAL has plunged by more than 10%.

The sell-off in airline stocks has been sparked by a combination of factors. This includes fears of a recession as there have been concerns that rising inflation and higher interest rates could see a drop in demand when it comes to leisure or corporate travel.

Other factors have been capacity constraints, volatility in the prices of jet fuel, and overall high inflation. A decline in airfares is also not helping matters.

According to data from the Bureau of Transportation Statistics, airfares fell 3% in November after a drop of 1.1% in October. However, airline fares were still up by 36% year-over-year in November on an unadjusted basis.

In this scenario, the mixed outlook from these airlines is not exactly helping matters.

Alaska Air Bullish on FY23

Earlier this month, Alaska Air put forth an encouraging outlook for Q4 as it expects its revenues to grow in the range of 13% to 14% to between $2.52 billion and $2.54 billion versus consensus estimates of $2.53 billion.

However, the airline group expects its Q4 capacity to be down by 7% to 9% as compared to its earlier forecast of a decline in the range of 7% to 10%.

The company stated that its demand outlook for the rest of Q4 remained robust “despite modest softening in corporate travel bookings.” For ALK, the improvement in fuel prices has been another big plus.

For FY23, ALK has forecasted its capacity to grow between 8% and 10% year-over-year assuming its delivery of new aircraft will be on schedule and it expects “to reach pre-pandemic capacity levels in late 1Q23.”

Moreover, Alaska Air plans to resume stock buybacks early next year.

ALK stock scores a Strong Buy consensus from analysts with five unanimous Buys.

Jet Blue Still Feeling the Blues in Q4

Jet Blue Airways stock has been feeling the blues this year fueled by its muted Q4 outlook. Moreover, its Q3 earnings proved to be a disappointment, missing estimates.

The only silver lining to this stock is that so far, is that its merger with Spirit Airline (SAVE) seems to be on track to be completed by 2024.

Analysts remain sidelined about JBLU stock with a Hold consensus rating based on one Buy and one Hold each and two Sells.

Delta Airlines Upbeat About FY23

Delta Airlines has fared relatively better than its peers following strong Q3 results and an upbeat FY23 outlook.

In order to address the shortage of pilots and to meet a rise in demand, it has also been reported that the airliner is luring pilots with massive pay hikes.

DAL stock is rated a Strong Buy by Wall Street analysts based on nine Buys and one Hold.

However, recently, Evercore analyst Duane Pfennigwerth downgraded the stock to a Hold from a Buy and also lowered the price target to $40 from $50.

The analyst’s price target implies an upside potential of 21.6% at current levels. Pfennigwerth cited that it remained to be seen how a turbulent macro environment would impact DAL’s upbeat outlook.

United Airlines Optimistic About Q4

Recently, UAL was in the news as the airliner placed its largest Dreamliner order with Boeing (BA) for around 200 planes.

The airline’s Q3 results have been nothing but stellar exceeding expectations. The company’s revenues jumped 13.2% in Q3 versus the same period in 2019 to $12.9 billion, beating Street estimates of $12.7 billion.

Adjusted Q3 earnings came in at $2.81, exceeding analysts’ estimates of $2.28. Around 39 million customers traveled by United flights in the quarter, which is, around 90% of the pre-pandemic volume. Further, UAL’s management is optimistic and expects the robust demand in travel to sustain going into Q4 and overcome recessionary pressure. 

Its Q4 operating margins are expected to exceed the pre-pandemic levels. Meanwhile, analysts expect the company to remain profitable in Q4 and deliver an EPS of 1.62.

Analysts are cautiously optimistic about UAL stock with a Moderate Buy consensus rating based on seven Buys, one Hold, and one Sell.

Conclusion

Barring JBLU, while other airlines are upbeat about Q4 and FY23, it remains to be seen whether the robust demand trends persist going into the new year.

With macroeconomic headwinds showing no signs of abating, it remains to be seen how these companies tackle this turbulence.