Are Airline Stocks Ready for Takeoff After a Turbulent 2025?

Key Points

• Airline stocks face headwinds from slowing demand, higher labor costs, and operational challenges, but Fed rate cuts could support a rebound in 2026.
• Delta Air Lines trades at a discount to historical averages and has received bullish analyst upgrades despite industry uncertainty.
• Southwest and American Airlines present diverging opportunities, with LUV priced near perfection and AAL a high-risk turnaround play at deep value.

Many investors avoid airline stocks due to their volatility, which can be triggered by the health, or lack thereof, in the broader economy. In 2025, investors are navigating crosscurrents that are making the outlook for airline stocks unclear.

For example, the cost of jet fuel dropped during the summer. That would normally be bullish, except that many airlines indicated that the decline was due to lower demand. It’s the first sign that the travel boom that began in late 2021 is starting to wind down, particularly among lower-income consumers, who are referred to as the back-of-the-cabin passengers.

The industry has also had to navigate air traffic control disruptions and the impact of new labor agreements. In fact, Delta Air Lines CEO Ed Bastian recently predicted that most U.S. airlines will incur losses in 2025.

However, if you follow Warren Buffett's playbook of being greedy when others are fearful, it could be a good time to invest in airline stocks. It appears that the Federal Reserve is at the beginning of a rate-cutting cycle. Those results won’t impact consumers right away, but they do bring hope that demand may turn around in 2026. Here are three airline stocks that are candidates for a rebound.

The Quality Play at a Discount

For many investors, the conversation about which airline stock to buy begins and ends with Delta Air Lines Inc. NYSE: DAL. The company hasn’t been immune to the macroeconomic themes impacting the entire sector, but the airline continues to deliver “better-than-feared" earnings that the company says are supported by solid corporate bookings and high-yield leisure travel.

That didn’t stop Delta, along with many other airlines, from withdrawing its full-year guidance in April amidst tariff concerns. It restored that guidance in the last quarter, but DAL stock is still down about 5.9% in 2025. That’s slightly below the performance of the SPDR S&P Transportation ETF NYSEARCA: XTN, which is down about 3.9% for the year.

That said, DAL stock is currently trading about 20% below its consensus price target and received several bullish upgrades in September, including from JPMorgan Chase, which increased its price target to $85 from $72 while maintaining its Overweight rating. The stock is attractively valued at around 7x forward earnings, a discount to its historical average and the sector average. Investors will get their next chance to evaluate Delta when the company reports earnings on Oct. 9.

Domestic Strength, But Priced for Perfection

With a forward price-to-earnings (P/E) ratio of over 20, Southwest Airlines Inc. NYSE: LUV is far from being a value stock in the sector. However, the company is known for its low air fares and, more importantly, for its ability to hedge fuel costs. With oil prices still consistently in the $60 to $70 range, investors haven’t been focused on this. But that could change if the price of oil increases due to higher demand.

Southwest is well-positioned if lower interest rates help spur domestic growth. The tradeoff is that the company doesn’t have an international footprint, which is where much of the demand has come from.

However, for now, that growth appears to be priced into LUV stock, which is trading within 3.5% of its consensus price target. Investors will hear from Southwest when it reports earnings in late October. That may provide the clarity analysts and investors need to bid the stock higher.

High Risk, High Reward Turnaround Potential

American Airlines Group Inc. NASDAQ: AAL stock is the worst performer in this group of stocks, down over 34% for the year and over 15% in the last month. The issue with American Airlines comes down to the $37 billion in debt on its balance sheet. That’s offsetting any positive sentiment about revenue growth and earnings that came in above expectations.

However, with AAL stock trading over 45% below its consensus price target, it’s fair to ask if things are so bad that they’re finally good. The answer to that may come from lower interest rates. This could spark domestic travel demand, which would play to the airline’s strength.

Another positive could come from the company’s balance sheet. Specifically, American has a young fleet of planes, helping to keep its capital expenditures at manageable levels. That means it can continue to work on deleveraging and generating free cash flow (FCF). Investors would love to see progress on both fronts and will hear more when the company reports earnings in late October.