SKYW - Buy These Five Top Airline Stocks For 2024

2023-12-29 09:00:00 ET

Summary

• 2023 saw a recovery in the global airline industry, with travel demand returning to normal levels in most parts of the world.
• Several airline stocks outperformed the broader market indices, proving that airlines can be investable if the right companies are chosen.
• Copa, Delta, Ryanair, SkyWest, and Southwest are all industry leaders, have distinctive characteristics, and have a track record of financial strength and growth.

The year 2023 was a year of recovery for the global airline industry. While travel demand in some parts of the world was muted during the pandemic and completely shut down in others, nearly all parts of the world saw a return to normal travel demand by 2023. Late in 2023, it has become apparent that some airlines are, once again, at the top of the industry in terms of financial strength while others have either returned to their previous positions of weakness or have become weaker.

One of the common misconceptions of investing is that airlines are not investable. 2023 proved that several airline stocks outperformed broader market indices and, in some periods, outperformed some of the hottest stocks. Airline investing is about finding the right companies; only a few airlines will ever be considered investable and even then, timing is key to financial success with those stocks. Each of the five airline companies that I will highlight are industry standout and has its own unique set of characteristics; still, they all share several common themes that set them apart from their competitors and alternative investments.

Distinctive Characteristics of Our Top Five

First, these companies are innovators and industry leaders in one form or another. While all bear the marks of financial leadership, they also have product and strategic leadership characteristics that set these five airlines apart. There are hundreds of thousands of commercial aircraft flying around the world for thousands of airlines. In most of the world, the airline industry has been privatized and free market principles have replaced the public utility or symbol of the national model that has long characterized the airline industry. Airlines provide a core transportation service and many airlines do that with no distinctive but also no financial success. The labor- and capital-intensive nature of the airline industry makes it very difficult to earn a profit esp. when many communities want volume in service and passengers served more than distinctive service.

Some of the five companies have innovated by being lower cost than their competitors, allowing them to succeed at the mandate of basic transportation. Each has a laser focus on costs but recognizes that cutting costs too deeply can leave airline service undesirable; all of these companies have managed to differentiate their product such that cost-cutting is both apparent to customers and palatable because of low fares. Other airlines have specifically focused on providing a high-quality product rather than focusing on costs and one of our top five airlines has high unit costs compared to other airlines but generates well-above average revenues. Key to an airline is where they fly and the type of network they operate and these airlines are as unique from each other in that regard as they are from their competitors. Their distinctive innovations are integral to their financial strength. Each of these airlines - and the industry - will be aided by relatively low oil prices which could persist until the northern hemisphere summer, providing these airlines with tailwinds heading into the busy summer season and providing one of the best first halves of the calendar year in five years.

Each of these airlines has a long track record of financial strength in an industry where finances are often marked by well-below-average performance compared to other industries. Each of these companies has a track record of profitability although many are currently short of where they have been in the past and where they expect to be in the near future. Each of them has demonstrated their ability to overcome adversity and return to their historic profitability on multiple occasions given that the airline industry faces repeated crises driven by external events. While some of the five airlines have very strong balance sheets compared even to other industries, others have balance sheets that look good only compared to their most direct competitors. All, however, understand the principles of being attractive to investors and work tirelessly to improve their balance sheets, regardless of how good they might be right now. Three of the five airlines pay a dividend.

Finally, each of these companies has a track record of growth. Because airline profitability is often directly tied to scale, each of these airlines has demonstrated they have succeeded at growing their networks and revenues in the past and are growing at or above the rate of their most direct competitors.

Our five carriers all trade on U.S. stock exchanges.

Copa

Copa (CPA) is a Panamanian airline that exclusively flies the Boeing (BA) 737 on a network that covers most of the North American and South American continents, taking advantage of Panama City's location as the crossroads of the Americas. While a number of carriers plan to use new technology narrowbody (single aisle) aircraft to cross the Atlantic, Copa has developed a network that can carry passengers over 7000 miles to 80 destinations via a single connection in the middle of the Americas.

Copa is a relatively young airline; although its history extends back more than 75 years, it only started to build its network outside of Panama in the 1980s, meaning its network has developed over just 40 years. It was a commercial partner of Continental Airlines which had an equity stake in the Panamanian carrier but the U.S. carrier sold its stake in the years following 9/11, leading to CPA's listing on the NYSE. Copa's livery is still similar to United ( UAL ) which merged with Continental over 10 years ago. Copa competitively prices its services to "pull" passengers from other network carriers.

Copa has some of the lowest unit costs of any airline in the Americas, due to lower labor costs in its home country than some of the larger countries in the Americas. Further, CPA's long average flights - 1200 miles, comparable to legacy rather than low-cost carriers, and average length of haul (distance traveled per passenger) of nearly 2000 miles highlight their niche as a low-cost intermediate haul carrier competing in a world with much larger global carriers.

CPA's balance sheet is pristine for the airline industry with low debt, very manageable capex, and strong cash flow. CPA is operating the Boeing 737MAX which will further extend its network range from Panama and allow heavier loads including those seen with intercontinental passengers. As travel recovery continues in 2024, Copa's future is strong. CPA pays a dividend with a forward yield of just over 3%, one of the highest in the airline industry which generally does not pay dividends.

Delta Air Lines

Delta ( DAL ) is defined best by superlatives in the industry - generating the highest revenue of any airline in the world (approaching $60 billion/year), the highest profits (expected to hit $7 billion in 2024), and the largest fleet of mainline (Airbus and Boeing) aircraft that will reach 1000 aircraft in 2024. Delta did not invent many of the initiatives that are now its distinctives but it has monetized and expanded many of those initiatives better than any of its competitors. Unlike some of the other top-performing airlines, Delta is not focused on low costs but rather on achieving premium revenues, which it obtains because of its industry-leading reliability and customer service metrics, leading the Atlanta-based airline to obtain higher percentages of business travel than its competitors. Its employees are some of the highest paid in the global industry including via one of the best profit-sharing plans in the world; Delta employees understand that their success is dependent on their company's success better than just about any other company. Delta has successfully focused on the growing trend toward premium travel experiences, growing its loyalty program and premium cabin revenues.

Delta is nearing a century of service and has expanded from its southern crop-dusting roots to one of the largest global airlines. Delta's financial strength has enabled it to expand its network into more of its competitors' markets than any other U.S. airline has done even while maintaining a higher total market share than its competitors. DAL's innovation includes equity investments in a half dozen global airline partners and operating the world's only airline-owned refinery which has lowered Delta's fuel bill by over $2 billion over the past decade.

Delta acquired dozens of used aircraft during the pandemic and continues to deploy them to supplement its new aircraft deliveries which it used to match its competitors' growth in 2023; that trend is expected to continue in 2024. Delta's balance sheet is weak when compared to our other top airline choices for 2024 but DAL has paid down large portions of its pandemic-era debt and is expected to continue to do so into 2024, buoyed by its non-transportation revenues including from its loyalty and credit card programs as well as its aircraft maintenance services, all of which generate higher margins than air transportation. Delta's current aircraft commitments are in line with American ( AAL ) but much lower than United ( UAL ) although DAL is expected to announce a widebody aircraft order in the near future; DAL is currently funding much of its capex through internally generated funds.

DAL stock is at the high end of Wall Street recommendations for the airline industry with a 28% upside based on consensus price targets. DAL's financial strength is expected to continue in 2024 as its revenue initiatives and efficiencies grow. DAL pays a dividend with a forward yield of 1%.

Ryanair

Ryanair ( RYAAY ) is an ultra-low-cost carrier headquartered in Ireland but serving most countries of Europe plus parts of the Middle East and North Africa. A relatively young airline, RYAAY has aggressively built its network over less than four decades to become the largest airline in Europe operating a near-exclusive fleet of Boeing 737 jets.

Ryanair has thrived because of its aggressive focus on cost control, financial strength, and its ability to stimulate traffic with low fares. On a continent where the legacy carriers dominate major airports, Ryanair has built its presence around secondary airports and what some would call bare-bones service; it has won a loyal following indicated by its ability to fill its jets (near 100% load factors) and deliver reliable basic transportation that covers the European continent. Often accused of crossing the line of being "too cheap," RYAAY has shaped European aviation in the same way that Southwest has shaped U.S. aviation - by extending air transportation to the masses. Unlike Southwest which has given up its title of being the lowest-cost U.S. large airline, Ryanair has relentlessly focused on driving its costs always lower than its competitors - even if finding no use for some of the values that helped build Southwest.

RYAAY was negatively impacted by the pandemic but has already started to recover and set its sights on even more growth in 2024. Despite repeatedly threatening to order from Airbus, Ryanair is a loyal Boeing customer and has been instrumental in bringing new models of the MAX such as the 737 8200, a high-density version of the 737-8 that activates additional emergency exits due to higher passenger levels. Part of RYAAY's growth risk is due to delivery delays on new Boeing aircraft; like United, Ryanair is a major customer for the MAX 10 which has yet to be certified and, like the smaller MAX 7, is delayed beyond original plans although RYAAY is later in the delivery timeline for MAX 10s than other customers.

Ryanair's balance is about as clean as an airline can get. With minimal debt and expected to have none in a couple of years, RYAAY's finances are buoyed by its claim of making 10 Euros from every passenger, quite remarkable considering its low total revenue per passenger. DAL and RYAAY have exchanged places this month for the title of the most valuable airline in the world based on market capitalization but both are worth much more than their most direct competitors, highlighting how well both are run as businesses even with their very different business models.

SkyWest

SkyWest Inc. ( SKYW ) is the holding company that owns the largest regional jet operator in the world and the only one that supports all four of the U.S. network/legacy airlines that use contracted regional jets in their operations - Alaska, American, Delta, and United. Under the banner of one of its partners, SkyWest provides regional jet service to more U.S. cities than any other airline. SKYW also operates ground handling, maintenance services, and aircraft leasing for other airlines and also operates charters as well as a few aircraft under its own colors (livery) under arrangements where it, rather than its larger partners, owns the capacity and is responsible for pricing and selling seats.

Regional airlines were hit particularly hard in the pandemic and post-pandemic period. Regional airlines had long been a stepping stone for many commercial pilots en route to a more lucrative career at large jet airlines that operate Airbus and Boeing aircraft - since airline pilots are usually paid based on the size of the aircraft they operate. As training for new pilots stagnated during the pandemic and many older pilots retired due to federal age limitations, the supply of pilots fell. When demand began to quickly return almost two years ago, larger airlines aggressively hired new pilots, raiding the ranks of regional airlines. While those same airlines tried to protect their own regional carrier networks by slowing hiring from regional carriers, they also had to pay larger and larger fees to regional airlines based on increasing labor costs even at the regional airlines.

As the recovery has continued, it has become clear that certain airlines have fared better and those "winning" airlines have been the legacy/global airlines that serve long-haul international markets that have been strong in 2023 - and are expected to continue into 2024 - just as there was a massive surge in domestic demand as covid lockdowns and disease outbreaks waned in 2022. It is those legacy/global airlines that use regional jets and have been willing to pay the higher costs that regional jet operations now require. In addition, supply chain and aircraft component reliability issues have slowed the growth of low-cost and ultra-low-cost carriers, leading some smaller carriers such as Spirit ( SAVE ) to slow or stop pilot hiring, reducing the pressure on the number of pilots even as new pilots are beginning to move through the pipeline.

In the midst of incredible instability, SkyWest has demonstrated resiliency and flexibility to adapt to massive changes. SKYW stock has been one of the best-performing stocks in 2023 after it was beaten down by fears of a collapse of the regional airline industry. Indeed, many regional airlines are weaker than they were before covid; the possibility of a contraction in the airline remains. At the same time, the legacy carriers recognize that the regional airline industry sector will shrink, in part because many of the smaller jets in regional carrier fleets are old and there are no cost-efficient replacements, particularly due to limits on contracted regional airline operations in legacy carrier pilot contracts. SKYW has the potential to be "the last man standing."

SKYW will be able to put more of its regional jets into service in 2024 which will fuel further stock appreciation. The Utah-based company's balance sheet is in better shape than those of many of its legacy partners. It is worth noting that Wall Street ratings and price targets have significantly underestimated the runup in SKYW stock in 2024 and the difference is starkest between Wall Street, Seeking Alpha Quant, and SA analyst recommendations than for any other airline stock. I recommended a buy rating on SKYW in late August and the stock has nearly tripled the performance of the S&P 500 index.

Southwest Airlines

Southwest ( LUV ) rounds out our list of top 5 airline stocks for 2024. Looking through the comparison charts above - since Southwest is alphabetically the last of the five airlines - provides plenty of opportunity to question if there is a mistake by including them. In reality, two of the five airlines on the list - CPA and RYAAY both carefully studied and copied many aspects of Southwest's business model while adapting other aspects. Southwest is one of the world's oldest low-cost carriers - at half the age of Delta - but has been one of the most financially successful carriers in the world. 2023 has been an aberration for LUV.

While a lot of data and stock movement is based on current trends coupled with company outlook, it takes going back several years to see why Southwest is on the list and why they might have one of the best chances of seeing solid momentum in their stock in 2024. As I noted in this SA article , Southwest has had a REALLY difficult 2023. Their post-pandemic attempts to match holiday demand spectacularly collapsed over a week of massive cancellations between Christmas and New Year. The repercussions are still being felt including by the Dept. of Justice's massive fine against LUV which is the largest ever levied against an airline, even excluding that the majority of the fine is essentially an account to compensate future Southwest passengers that incur operational disruptions. The cost of that week is in the billions including the loss of market valuation on top of customer compensation and refunds. Southwest had to aggressively discount to win back traffic and its customers cashed in hundreds of millions of dollars of compensation. The biggest operational loss has been to leave Southwest with much less ability to grow. Carrying more passengers than any other U.S. airline, Southwest has been forced to sideline growth to make sure it does not repeat that horrid week.

LUV's woes go back well before Covid, though. It signed on as an early customer for the Boeing 737 MAX 7 aircraft, wanting to use the smallest version of Boeing's latest jet family to replace its massive fleet of 737-700 aircraft. Due to the ground of the MAX fleet and heightened certification procedures for all Boeing aircraft, LUV has had to up-gauge to the larger MAX 8 aircraft, adding seats it doesn't want and forcing the airline to discount to fill those seats even while operating more of its network on a hub and spoke basis rather than its preferred point to point system. Boeing now believes it will certify the MAX 7 in early 2024; Southwest should begin receiving its aircraft in the spring, although Boeing has repeatedly missed intended delivery dates, explaining why the airline intends to move very slowly in planning for the introduction of the smallest MAX jet. Its guidance has thus been modest which will likely lead to lower industry capacity growth in the first half of the year, benefitting all carriers but esp. helpful for LUV through higher fares.

Southwest recently announced that it has agreed to a new contract with its pilots, months after the big 3 U.S. global carriers settled for costly new contracts; membership voting results should be available in January. LUV's flight attendants rejected a contract proposal but the union recalled the vote due to concerns about the integrity of the vote. Southwest's willingness to restore its historically good relationship with its employees by agreeing to significantly higher wage rates is indicative of its hope that 2024 will see a restoration of its revenues and profits.

Southwest's balance sheet has been one of its greatest attributes and the company has no net debt despite its weak revenues over the past four years. For years DAL and LUV's market cap swapped places for the top airline in the world spot but DAL now is valued at a nearly 50% premium to LUV, showing how deep the hole from which LUV has to extricate itself. Still, LUV's market cap is worth more than AAL and UAL highlighting the fundamental strength for the Dallas-based airline. LUV pays a dividend with a 2.5% forward yield.

You can't go wrong with any of these airlines

Each of these five airlines demonstrates leadership and financial success which will continue in 2024. Fundamentals will matter and differentiate performance within the industry again; much of the industry has moved as a bloc for the past 3 years but now individual companies will move based on their own performance.

U.S. airlines will begin to report their fourth quarter 2023 earnings in less than two weeks, will provide guidance for the first quarter of 2024, and will likely also provide insights into their view of 2024 as a whole. The expectations are for a strong winter 2023 season and continued strength which should buoy these stocks. Uncertainty regarding the global economy will likely resolve itself by the summer, providing an opportunity to either reinforce equity positions into the second half of the year or exit with gains.

Copa, Delta, Ryanair, SkyWest, and Southwest all provide great opportunities to invest in an industry that will grow and expand in 2024.

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