Is it Finally Liftoff for These 3 Airline Stocks?

Look no further than airline stocks to see that it is an unusual time in the market. 

After last week ended in a brutal selloff, the S&P 500 is down 10% since the start of the year and approaching its late-February lows. The ongoing Russia-Ukraine conflict, rampant inflation, and rising rates have thus far overshadowed first quarter earnings reports.

It’s a different story in the airline group which has managed to shrug off higher oil prices and renewed coronavirus concerns. Airlines have been a surprising outperformer in 2022 with investors searching high and low for alpha sources. The S&P’s five airline stocks are up anywhere from 9% to 18% year-to-date. 

We’ve seen this movie before though. Signs of a global travel recovery have frequently spurred runs in airline, hotel, and leisure stocks over the past year. But eventually, these rallies have faded and given way to new 52-week lows.

Does the current airline stock rally have more mileage? Or will it soon be grounded? Let’s check in with a few companies. 

Why is Southwest Airlines Stock Up? 

Southwest Airlines Co. (NYSE:LUV) is trading near its high for the year although it is almost 30% below its post-pandemic peak. Earlier this month the stock got a boost from news that suggested the travel recovery is well underway.

The company announced that it is expanding its flight capacity in key business and leisure markets along the West Coast. Starting June 5th, Southwest will expand its schedules from San Diego and San Jose to other parts of California and the Pacific Northwest. More flights that connect passengers to Hawaii and Cuba are also forthcoming. 

The news was well-received by investors who took it as a sign that demand for both business and leisure travel is healthy. Ultimately moves like these should drive improved top and bottom-line results even with fuel and labor costs on the rise. 

On Thursday we’ll learn more about how the year began when Southwest announces first quarter results. The Street is expecting a net loss for the period but a return to profitability for the year. Expansion in core markets is likely a sign of good things to come for Southwest shareholders.

Is Allegiant Travel Company Stock on the Rebound?

While it is down slightly for the year, Allegiant Travel Company (NASDAQ: ALGT) has joined in the airline rally having bounced 25% off last month’s 52-week low. The Las Vegas-based low-cost carrier has been doing some expansion of its own.

Earlier this year Allegiant reached a multiyear deal to purchase 50 Boeing 737 aircraft to grow and modernize its fleet. Deliveries of the planes won’t begin until 2023 but the deal marks an important step in the airline’s recovery. With a focus on nonstop flights to smaller U.S. cities and vacation spots, Allegiant is uniquely positioned to benefit from pent-up travel demand. Below industry fares at a time when consumers are reining in their budgets are likely to be a competitive advantage.

This spring, Allegiant is adding nonstop flights to Austin, Nashville, San Diego, and Savannah with one-way fares starting at a dirt cheap $39. Expansion in Austin could be a particularly lucrative opportunity given the rapid economic growth in the region. 

There have been early signs of progress. Last week Allegiant announced that first quarter revenue was up 10.7% from 2019. More than 3.7 million passengers boarded an Allegiant aircraft during the period compared to 3.4 million in Q1 of 2019. 

With traffic volumes having flown past pre-pandemic levels, investors can feel better about taking a chance on beat up Allegiant shares. At 11x next year’s earnings estimate, the stock has a valuation to match its low fares. 

What Does Wall Street Think About Delta Air Lines?

Delta Air Lines, Inc. (NYSE: DAL) is up 12% year to date but has room to return to the $52 level of a year ago. The company appears to be moving towards improved financial health. 

At its Capital Markets Day, management outlined a plan to exceed pre-pandemic earnings power by 2024. It expects to return to “meaningful” profitability this year on increased business activity and an ongoing recovery in leisure travel. Along the way it plans to pare down its debt, which has been a primary concern among investors. Delta exited the first quarter with $25.6 billion in total debt versus $12.8 billion in total liquidity. 

Like other airlines, escalating fuel expenses are a headwind. Delta’s average fuel price jumped 37% to $2.79 per gallon last quarter, and the company is projecting an average cost as high as $3.35 in the current quarter. 

To help combat the variability of fuel costs, Delta inked a seven-year agreement with sustainable aviation fuel (SAF) provider Gevo. Its purchase of 75 million gallons per year of SAF will advance its goal of replacing 10% of conventional fuel by 2030.

Analysts have become increasingly bullish on Delta in the wake of its Q1 report—and the removal of the mask mandate. Last week J.P. Morgan lifted its price target to a Street-high $70, which implies 60% upside. 

Yes, airline stocks could actually gain altitude in the months ahead.