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How to Play the Surge in Airline Stocks

Airline stocks surged in June and are having a solid July, but which domestic carriers belong in first class and which are stuck in the jump seat?

Airplane Taking Off

The feature article of last month’s Cabot Money Club Magazine was all about ticking off bucket list travel destinations on a budget, how to save money while you jetset and which travel stocks look the most attractive.

It seems only fitting that airline stocks, as measured by the U.S. Global Jets ETF (JETS), have tacked on another 2.7% so far this month after rallying 17% in June.

This recent surge was largely prompted by higher earnings expectations from American Airlines (AAL) reported at the end of May.

This was followed by commentary by Delta Air Lines (DAL)’s management at a recent Investor Day in which they projected that full-year earnings would come in at the high end of their proposed range and raised projections for Q2 earnings from a range of $2-$2.25 per share to $2.25-$2.50 per share.

As expected, when the company reported results on July 13, they reported solid earnings (that beat even those higher projections), with EPS coming in at $2.84, and management sounding the same cadence about Q3 earnings in September.

And while there are echoes of 2021’s false-start summer of travel, the pandemic does well and truly appear to be behind us, and consumers (in the U.S. at least) are being buoyed by a strong labor market, with the lowest unemployment rate in more than 50 years.

So, given the confluence of factors domestically (no travel restrictions, consumer still strong) let’s take a look at the eight largest major U.S. carriers (sorted by year-to-date performance) and see which of the airline stocks look like they still have long runways of growth ahead of them.

U.S. Airline Stocks by YTD Performance

Company (Ticker)
YTD Returns
1-Month Returns
Forward PE
Analyst Rating
Delta Air Lines (DAL)
1.6 (Buy)
United Airlines (UAL)
2.3 (Buy)
American Airlines (AAL)
2.9 (Hold)
JetBlue Airways (JBLU)
3.1 (Hold)
Alaska Air Group (ALK)
1.8 (Buy)
Southwest Airlines (LUV)
2.4 (Buy)
Frontier Group (ULCC)
2.2 (Buy)
Spirit Airlines (SAVE)
3 (Hold)

That list offers three items of note that immediately jump out to me. The first, every airline stock is carrying a consensus “Hold” rating or better from analysts, with JetBlue being the lowest-conviction stock among covering analysts.

The second item of note is the lack of forward earnings for Frontier Group. When reporting Q1 earnings in May, Frontier reported a loss of $17 million, with a million of that arising from the failed merger with Spirit. However, on the conference call, management noted unexpected trends among consumers.

Namely, that the prevalence of work from home has also translated to more work from the road, with travelers having increased flexibility to travel while they’re still on the clock. This led to an uptick (with Frontier at least) in travel demand around already-peak travel times like weekends and holidays. (Any weekend can be a three-day weekend if you can wrap up your Friday on a laptop in the airport.)

Frontier hopes better and smarter scheduling can allow it to capture that trend, and they’ve got $790 million of cash on their balance sheet to buy them the time to figure it out.

The third item of note is Spirit. It’s the only stock on the list with negative YTD returns and is trading at a (relatively) astronomical 41 times forward earnings. It’s also the second lowest-rated stock on the list by covering analysts.

For investors looking to play the recent strength in airline stocks, an ETF like JETS offers exposure to all of the stocks above as well as smaller players like Allegiant (ALGT) and Hawaiian (HA) and insulates you from some company-specific challenges like negotiating with pilot or employee unions, aircraft maintenance or delivery issues or delays, or even traveler preference.

For investors looking for just one or two airline stocks from this list, United and Delta both trade at reasonable multiples, carry consensus buy ratings, and have been in the captain’s seat of the sector all year.

Brad Simmerman is the Editor of Cabot Wealth Daily, the award-winning free daily advisory.