Investors are pouring money into global airline stocks, with an index for the sector reaching its highest level in two years. The MSCI All World Stock Index for airlines is at the highest level since June 2021. The index is up about 20% from the end of 2022, as airlines have outperformed the overall 14% rise in global stocks.
The question arises whether more profits lie ahead for investors in airline stocks, and I believe the answer is a resounding yes.
The reason? The ongoing post-pandemic travel demand recovery and the stabilization of fuel prices.
Airlines for America (A4A) expects the daily average of seats this summer will reach nearly 3.4 million, an increase from 3.3 million per day during the summer of 2019. This translates to an estimated 137 seats per flight, representing a 14% rise compared to four years ago.
In addition, the International Air Transport Association (IATA) raised its global airline profit outlook to $9.8 billion by year-end, more than double the previous forecast of $4.7 billion. The group expects around 4.35 billion people to fly commercial in 2023, or about 96% of 2019 levels.
Air Carriers Keep Soaring
In June, American Airlines (AAL), the world’s largest airline by passengers carried, upgraded its guidance for the second quarter based on what it sees as “continued strength in the demand environment.” In a regulatory filing, American said it now forecasts quarterly earnings per share to fall within the $1.45 to $1.65 range, an increase from its previous estimate of $1.20 to $1.40 per share.
The revision is based on not only stronger-than-expected demand but also those aforementioned lower fuel costs. The carrier estimates it will pay between $2.55 and $2.65 per gallon on average during the quarter, or $0.10 less per gallon than its initial forecast. Fuel consumption is also down compared to years past since American is flying larger aircraft that can accommodate more passengers per flight.
On July 13, Delta Air Lines (DAL) reported the highest revenue and earnings in its history, with a 65% surge in sales of transatlantic flights providing substantial lift to the company’s top line. Delta’s transatlantic capacity exceeded pre-pandemic levels late last year, with the airline adding seats and flights faster for international than for domestic routes.
The carrier raised its full-year guidance for the second time in less than three weeks, to a range of $6 to $7 per share, after beating Wall Street’s earnings expectations.
Delta CEO Ed Bastian said, “Anywhere you go in Europe these days, you’re seeing an awful lot of Americans. They haven’t been able to get there in four years, and there’s a lot of pent-up demand that’s going to stay strong for some time. We’re not seeing a lot of slowdown into the fall.” Bastian added that, historically, the airline would fly less to Europe following the busy summer, but this year “we’re extending the season a bit longer because of the demand”.
Revenue from Delta’s domestic flying ticked up only 8% to $8.9 billion. Meanwhile, revenue from transatlantic flights rose 65% to $2.8 billion. The growth on Pacific routes was even stronger — 175% to $532 million — while revenue from Latin American routes rose 24% to $926 million.
It looks like international travel will continue to outpace domestic travel for now. So conditions for the rest of 2023 look more compelling for Delta and American, as well as United Airlines (UAL), than it does for domestic growth airlines. United has one of the largest global networks of U.S. carriers.
That makes all three stocks candidates to continue making 52-week highs, as they all have recently. And indeed, all three airlines do receive POWR Ratings of B – Buy.
Lets take a closer look at the POWR Ratings components for each stock.
At Delta, it gets B ratings for growth, quality, momentum, and sentiment. For American, it gets B ratings for growth, quality, value, and momentum. Finally, at United, it gets B ratings for growth, value, and momentum.
Through year-end, it would not surprise me to see all three stocks add another 40% or so to their already impressive gains in 2023 of about 45% each.
Please buckle up and prepare for an enjoyable flight!
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DAL shares were trading at $48.34 per share on Wednesday afternoon, down $0.03 (-0.06%). Year-to-date, DAL has gained 47.42%, versus a 19.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Tony Daltorio
Tony is a seasoned veteran of nearly all aspects of investing. From running his own advisory services to developing education materials to working with investors directly to help them achieve their long-term financial goals.
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