How to invest in airline stocks

Key Points

• Airline stocks suffered more than most sectors during the COVID-19 pandemic.
• Airline stocks are heavily regulated and have high capital expenditure and fuel costs.
• Due to high demand, airlines are expected to return to profitability, but several headwinds remain.

Looking for airline stocks to invest in? 

Airlines are notoriously fickle companies since many factors go into their continued operations. While airlines aren't as heavily regulated as they were in past decades, these companies still have to deal with quite a bit of federal oversight, and commodity prices like oil can influence their profits. 

But airline stocks intrigue even renowned investors like Warren Buffett, and air travel is rebounding significantly now that COVID-19 is in the rearview. In this article, we'll look into airline stock trends for 2024 and the pros and cons of adding these companies to your portfolio.

Key takeaway

The industry returned to profitability in 2023. According to the International Air Transport Association, commercial airlines took in over $23 billion in net profits compared to a $3.8 billion net loss in 2022. Net profits are expected to increase to $25.7 billion in 2024, with more than 40 million anticipated global flights.

Understanding the airline industry

Few industries suffered more during the pandemic than airlines. With travel halted, even the best airline stocks plummeted in March 2020. Many are yet to fully recover to their previous highs, including the United States' "big three": American, Delta and United (more on them later).

When travel began to reopen, the airplane stocks were once again hit with a shock, this time by Russia's invasion of Ukraine, which sent oil prices skyrocketing and significantly increased the cost of fuel. Fueling planes is one of the most significant costs incurred by airlines, and the price per gallon reached multi-year highs in June 2022. But inflation has cooled significantly over the last year, and fuel costs are a major reason. 

In December 2023, fuel cost $2.80 per gallon, down more than 20% from the previous month. Domestic fuel consumption has nearly recovered to pre-pandemic levels; however, fuel costs have been up over 42% since December 2019.  

The Federal Aviation Administration (FAA) regulates air travel in the United States and oversees the certification of planes and pilots and the management of airports. Following the September 11 attacks, the Transportation Security Administration (TSA) created an additional safeguard for passengers and travel hubs.

Fundamentals of investing in airline stocks

Some important metrics to consider when investing in airline stocks include:

• Price-to-earnings ratio: P/E ratios measure the price of a stock compared to the company's earnings. The lower the P/E ratio, the more value a public company gets for each dollar of earnings. Calculate values on your own using MarketBeat's P/E calculator.
• Debt-to-equity ratio: The risk rate compares a company's total debt (short and long-term, plus fixed payments) to shareholders' equity. While a high debt-to-equity ratio isn't always a red flag, companies with lower values can better service their liabilities during a disruption.
• Revenue per available seat mile (RASM): Here's a metric unique to the airline industry. "Available seat mile" means each mile flown by each seat on the aircraft, so a 50-seat plane flying 500 miles would have 5,000 available seat miles. RASM is how airlines calculate how much revenue they earn per seat on their air fleet.

These are just a few factors investors use to evaluate airline stocks, but don't limit your research to just these three. Use MarketBeat's comprehensive Airline Stocks page to compare carriers across fundamental and technical indicators.

Types of airline stocks 

You can break airline companies down by size, location and the type of service they offer passengers. For this article, we'll break down airline stocks based on the three distinct types of business models they employ to service customers.

Full-service carriers (FSC)

Also known as network or legacy airlines, these are the largest players in the industry that serve the broadest range of clients and business travelers. FSC airlines have large fleets of planes offering domestic and international travel with daily flights, rewards for frequent fliers and multiple classes of travel like business and first class. These firms are household industry names like United Airlines Holding Inc. NASDAQ: UAL, American Airlines Group Inc. NASDAQ: AAL and Delta Air Lines Inc. NYSE: DAL.

Low-cost carriers (LCC)

Below the full-service airlines are the low-cost carriers, which provide service to limited popular destinations and have smaller aircraft fleets. Frequent flier programs don't exist with these carriers, and they keep added perks to a minimum. An LCC aims to provide affordable and convenient travel to a centralized list of destinations, usually within the domestic airspace of the carrier's home country. In the United States, the most recognized LCC is Southwest Airlines Company NYSE: LUV, which offers flights to 42 states. Other LCCs include JetBlue Airways Corp. NASDAQ: JBLU and Ireland's Ryanair Holdings PLC NASDAQ: RYAAY.

Ultra-low-cost carriers (ULCC)

Finally, we have the ultra-low-cost carriers who offer the cheapest available tickets with no frills, luxuries or added services. If you've ever flown on a ULCC, you may have heard the phrase "bus in the sky," since that's what travel on one of these flights resembles. 

You won't find fancy drinks, movies or any other special amenities, and each additional service, like baggage check and seat selection, carries a fee. The ULCCs you're probably most familiar with are Spirit Airlines Inc. NYSE: SAVE and Frontier Group Holdings Inc. NASDAQ: ULCC.

Factors influencing airline stock prices 

Finding the best airline stocks to invest in requires a different evaluation than most stock research. Airlines face heavy regulation and unpredictable costs, and their stocks haven't always rewarded investors. Your reasoning must be sound if you plan to invest in these companies.

Company health

Overvalued airlines rarely make a good investment, so the first features you should look at are figures like enterprise value and debt-to-capitalization rate.

• Enterprise value: To find the enterprise value, take the company's total market cap and add the value of all preferred stock, long and short-term debt and any minority interest claims. Take this total and subtract the company's cash and cash equivalents (all current cash holdings plus bank deposits), and you'll get the enterprise value. Calculating enterprise value requires some digging into the balance sheet.
• Debt-to-capitalization rate: Commonly used to measure a company's solvency (always a pertinent issue with airlines), the debt-to-capitalization rate is found by taking the company's total debt (short and long-term) and dividing it by total capital. Total capital is a combination of total debt plus shareholder equity. If the rate is too high, it could show an airline using too much debt to finance its operations.

Airlines always seem cheap when using the price-to-earnings ratio, or P/E ratio (share price divided by earnings per share), so that's not an ideal metric for finding the best airline stocks to buy.

Free cash flow 

Not only are airlines heavily regulated and beholden to fuel costs, but capital equipment in the industry is expensive. Airplanes are hard to make, and the equipment used to fuel them, service them and clean them is also costly. When evaluating airline stocks, monitor the free cash flow yield. Airlines with cash flow problems may struggle to fulfill their operating expenses.

Management

Finally, airlines don't have the best reputations. You'd be hard-pressed to find another industry in which the public is more sour than the airlines. This is partly due to management: many airlines mismanage customer relations and financial matters. Most major U.S. airlines have declared bankruptcy at one point or another (except Southwest). If buying airline stocks, ensure the company has a management team you believe in.

Risks associated with investing in airline stocks

Some risks that remain elevated for airlines heading into 2024 include:

• Staffing: Airlines had trouble finding pilots and flight attendants following the end of the pandemic, and staffing issues remain a headwind in 2024 (especially for pilots, who have been successfully bargaining for higher wages).
• Costs: Wages aren't the only cost concerns airlines are dealing with; fuel remains expensive, although prices have dipped below 2022 peaks. But fuel remains elevated above pre-pandemic levels.
• Peak demand: After being cooped up for two years, travel demand rebounded sharply in 2022 and 2023. And while 2024 should be a busy (and profitable) year, accelerating consumer debt and high interest rates could tap out travelers later in the year.

Strategies for investing in airline stocks

Airline stocks can be part of a portfolio using several strategies and methods. The airline industry depends on consumer trends and fuel prices for profitability, and the sector has lagged the S&P 500 since COVID-19 whipped around the planet.

But if you believe the airline sector is poised for a turnaround, here are three strategies to consider when investing depending on your risk tolerance and goals:

• Value investing: Look for airlines with affordable share prices using metrics like P/E ratio, enterprise value, gross margins and debt-to-equity rate.
• Growth investing: Airlines aren't always known as growth giants, but if you want the fastest growing companies, look for those reporting annual sales and profit growth increases.
• Dividend investing: Most airlines suspended their dividends during the pandemic, and right now, Southwest Airlines and Delta Air Lines are the only firms to have reinstated their payout. But keep an eye on future earnings reports in this sector if business picks up and companies return capital to shareholders once again.

How to add airline stocks to your portfolio 

Interested in investing in airline stocks right now? Here's how to add these companies to your portfolio:

Step 1: Research airline companies.

Which types of airlines do you want to invest in? Low-cost carriers or big network carriers? Companies with regional transportation hubs or ones that travel the globe? Domestic companies or international firms? Determine your investment thesis and research the companies that fit your outlook.

Step 2: Open a brokerage account.

Once you've located your ideal airline investments, you'll need a brokerage account to buy shares. You can purchase airlines in typical taxable vehicles like cash and margin accounts or buy them for your traditional or Roth IRA.

Step 3: Decide how much capital to put toward airlines.

Airlines have lagged behind the market in recent years, but past performance doesn't predict future performance. Still, you never want to put too much capital into a single industry, especially one with a track record like the airlines. If you want a diverse portfolio, only devote a small amount of your overall capital to airline stocks.

Step 4: Buy your shares and monitor your investments.

Airline stocks are easy to find on most major brokerages, especially mega-cap stocks. Only buy shares of the companies you research and ensure they mesh with your long-term goals. How long do you plan on holding these airline stocks? Where are your take-profit points? What types of losses are you willing to endure? Keep track of your investments and exit positions when you reach your parameters.

Airline ETFs

If you don't want to research individual companies, you can buy a big chunk of the sector through airline ETFs. Some ETFs are broadly invested in the entire travel sector, which includes hotels, restaurants and other forms of transportation. The only available ETF with a clear focus on airlines is the U.S. Global Jets ETF NYSE: JETS.

The Jets ETF only has $2 billion in assets, but it's the only way to get pure exposure to a broad selection of airlines without including other travel and transportation stocks. JETS offers exposure to the big three U.S. airlines, plus various regional and low-cost carriers. You'll also get exposure to Canadian airlines trading over the counter in the U.S., such as Air Canada and Bombardier Inc.

If you're willing to expand to the larger transportation sector, other ETF options come into play. The largest is the iShares U.S. Transportation ETF BATS: IYT, which holds airlines along with railroad companies, delivery services, rideshare and trucking companies. Other transportation ETFs include the SDPR S&P Transportation ETF NYSE: XTN and the U.S. Sea to Sky Cargo ETF NYSE: SEA.

Long-term outlook for airline stocks

Airlines were finally profitable once again in 2023 and that trend should continue in 2024. Global disruptions like COVID-19 no longer influence travel trends, and plummeting fuel prices are a tailwind for the industry.

Total revenue from leisure travel should exceed $600 billion in 2024 and surpass $700 billion by 2027. While business travel may be a headwind due to work-from-home policies, the leisure traveler is yet to show any signs of weakening demand. But remember that the airline industry is difficult to invest in due to several competing factors like commodity prices, regulation and geopolitical events. Even Warren Buffett became tired of investing in airlines.

You may need to wait for the right market conditions 

The airlines aren't for impatient investors. Over the last few years, the industry has been dragged through the proverbial muck. Profitability returned for airline stocks in 2023, although a recession in 2024 could keep these stocks grounded. 

When looking for airline stocks to invest in, it's important to remember the business layout. Government regulators are always looming over the industry, capital expenditures are high and inflated fuel prices can hinder the entire sector. Risk isn't the only thing to manage when investing in airline stocks — you'll also need to keep your expectations in line.

FAQs

Still considering what the best airline stocks to buy are? Here are a few of the most frequently asked questions about airline stocks and the industry.

What is the best airline stock to buy now?

The best airline stock will vary depending on the time frame and goals of the investor. Airlines have been tricky investments for several years now; even Warren Buffett got tired of trying to figure them out. The definition of "best airline stock" always depends on the individual considering the investment.

What has happened with the airline industry over the past few years?

The airline industry suffered during the COVID-19 pandemic as it brought travel to a standstill. Once COVID faded and travel began to open up, rising fuel costs significantly hindered the airlines' ability to turn a profit. The last few years have not been kind to airline stocks, although fuel prices and travel trends have been moving in a favorable direction.

Are airline stocks a good investment?

Airline stocks can be a tricky sector to invest in since these companies are heavily regulated, and fuel costs vary with commodity prices, which can be unpredictable. Airlines do well in good economies but suffer during recessions when consumers cut back on significant expenses like travel.