3 Sky High Stocks: Which Airline Takes the Lead?

Key Points

• The airline industry is inherently cyclical, with performance closely tied to economic conditions and travel demand.
• While the industry faces headwinds from rising costs and economic uncertainty, pent-up demand and a rebounding international travel market offer growth potential.
• Investors should carefully evaluate airline stocks based on their financial health, operational efficiency, strategic initiatives, and market position to identify those best positioned for success.

The airline industry was once a symbol of soaring growth, but recently, it has been navigating a turbulent environment. Rising operating costs, economic uncertainty, and operational disruptions have created significant airline industry headwinds. The 2024 summer travel season presents a unique mix of potential opportunities, driven by pent-up demand and a rebound in international travel, alongside ongoing challenges such as labor shortages, inflationary pressures, and global economic uncertainty. Can airlines balance these factors to capitalize on increased travel demand while maintaining operational efficiency and managing costs? 

Industry Dynamics: Cyclical Patterns and Recent Turbulence

The airline industry is inherently cyclical, and its fortunes are closely tied to the financial health of the global economy. Statistics reveal that during periods of economic expansion, travel demand soars, boosting airline revenues and profits. Conversely, economic downturns lead to decreased travel spending, impacting airline profitability. Several factors, including consumer confidence, fuel price volatility, seasonal travel patterns, and the unpredictable nature of geopolitical events, drive this cyclicality.

Currently, the industry faces multiple different headwinds. Rising costs, particularly fuel and labor expenses, are squeezing profit margins. Fueled by recessionary fears, economic uncertainty has dampened leisure and business travel demand. Operational challenges, ranging from staffing shortages to weather disruptions, further complicate the landscape. A strong US dollar also challenges airlines with significant international operations, making travel less appealing for foreign tourists.

However, despite these challenges, glimmers of hope have emerged. Oil prices show signs of stabilization, potentially easing cost pressures. Pent-up travel demand, accumulated during pandemic restrictions, could fuel a rebound in travel spending. Airlines also proactively implement cost-cutting measures and optimize their networks to enhance efficiency and profitability. The gradual recovery of international travel, spurred by easing travel restrictions, presents further growth opportunities for airlines with a global reach.

Delta Air Lines: A Global Contender Navigating Recovery

Delta Air Lines NYSE: DAL, a primary international carrier with a robust domestic network, is well-positioned to benefit from a recovering global travel market. Delta's stock is trading around $47, with a market capitalization of $30 billion and a price-to-earnings (P/E) ratio of 6.09. This ratio indicates that investors will pay $6.09 for every $1 of Delta's earnings. This is considered a relatively low P/E ratio for the airline industry, potentially indicating that investors perceive Delta’s stock as a value with good earnings potential. Delta Air Lines analyst community has placed a consensus "Buy" rating on the stock, with an average price target of $60.30, representing a potential upside of 27.3%.

Delta's earnings report for the first quarter of 2024 revealed a strong recovery in revenue and profitability. The airline reported operating revenue of $12.6 billion, a 6% increase year-over-year, and operating income of $640 million, representing an operating margin of 5.1%. The airline's focus on business travel, which has been slower to recover than leisure travel, is starting to pay off, with managed corporate sales growing 14% year-over-year.

Delta is implementing a multifaceted strategy to navigate the current environment. The airline focuses on increasing ancillary revenue through baggage fees, seat upgrades, and onboard sales. Delta is also enhancing its SkyMiles loyalty program to retain customers and increase their lifetime value. The airline invests in technology to improve operational efficiency, personalize customer experiences, and streamline booking processes. Additionally, Delta is prioritizing sustainability initiatives to attract environmentally conscious consumers and reduce its carbon footprint.

Southwest Airlines: A Domestic Powerhouse Embracing Optimization

Southwest Airlines NYSE: LUV, known for its low-cost model and robust domestic network, is poised to capitalize on the continued strength of domestic leisure travel. Southwest's stock is trading at around $28, with a market capitalization of $17.10 billion and a P/E ratio of 45.37, significantly higher than Delta’s. Southwest Airlines analyst community has a consensus "Hold" rating on the stock, with an average price target of $29.83, representing a potential upside of 4.7%. It is essential to acknowledge that, based on a high-end analyst forecast of $42, the upside potential could reach as high as 47%.

While Southwest’s earnings report recently revealed a net loss of $218 million in the first quarter of 2024, the airline saw a strong sequential improvement in unit revenue, driven by an acceleration in managed business revenues and benefits from network optimization efforts. These adjustments included capacity reductions in certain underperforming markets and closing operations at Bellingham International Airport, Cozumel International Airport, Houston's George Bush Intercontinental Airport, and Syracuse Hancock International Airport.

Southwest is focused on enhancing operational efficiency and controlling costs. The airline is limiting hiring and offering voluntary time-off programs and expects to end 2024 with approximately 2,000 fewer employees than in 2023. Southwest is also optimizing its network to improve profitability and implementing cost control initiatives to mitigate the impact of higher fuel prices and other cost pressures.

JetBlue Airways: A Niche Player Aiming for Efficiency

JetBlue Airways NASDAQ: JBLU, a growing domestic airline with an expanding international presence, is focusing on improving operational efficiency and adjusting its network to enhance profitability. JetBlue's stock is trading at around $6, with a market capitalization of $2 billion. Analysts have a consensus "Reduce" rating on the stock, with an average price target of $5.75. This suggests a downside of 3.5% based on the average price target. However, JetBlue’s analyst community opinions vary significantly, with some analysts offering significantly higher price targets. For example, one analyst has a price target of $9.00, representing a potential upside of 56% from current levels. This wide range of opinions highlights the significant uncertainty surrounding JetBlue's financial performance.

JetBlue’s earnings report revealed a net loss of $145 million in the first quarter of 2024, attributed partly to elevated capacity in its Latin American region, which is experiencing significant competition. However, the airline saw encouraging performance from its domestic and transatlantic flying and continued strong demand for premium seating options.

JetBlue is implementing a rejuvenated standalone strategy designed to enhance reliability, optimize its network, and achieve cost efficiencies. Several notable network changes have been announced, including reduced Los Angeles International Airport flight operations. Additionally, the airline is reallocating flights to more lucrative opportunities in its core leisure markets and rationalizing its presence at seven stations. Moreover, JetBlue has implemented cost-saving initiatives, such as offering voluntary opt-out options for specific work groups, streamlining its real estate footprint, and continuing its fleet modernization program, which is projected to generate $100 million in cost savings by 2024.

Comparing the Contenders

Investors must consider a complicated landscape when assessing Delta, Southwest, and JetBlue. Delta, boasting strong revenue growth and profitability, attracts investors seeking stability. Its extensive international network and focus on business travel position it favorably against recovery signs in these sectors. However, higher operating costs compared to peers pose a risk should fuel prices spike.

Despite a recent net loss, Southwest offers a compelling low-cost model with a robust domestic network. Its impressive revenue growth, driven by leisure travel and network optimization, suggests a potential for swift profitability. The airline's conservative financial approach with low debt further mitigates risk. However, its limited international presence and dependence on the cyclical leisure travel market may make it vulnerable to economic fluctuations.

JetBlue's current environment necessitates a cautious approach. Declining revenue and negative operating margins highlight competitive pressure, particularly in the Latin American region. While JetBlue is implementing cost-saving measures and network adjustments, its smaller scale and analysts' "Reduce" rating indicates a higher risk profile. Investors must closely monitor its progress towards sustainable profitability.

Ultimately, the ideal choice depends on individual investor risk tolerance and goals. Delta offers stability and growth potential for those seeking a diversified airline with global exposure. Southwest presents an opportunity for those attracted to its low-cost model and a potential surge in domestic leisure travel. JetBlue, though riskier, may appeal to investors seeking a potential turnaround story and willing to accept a longer-term outlook.