LUV - Gliding through 2023 will major U.S. airline stocks ascend higher next year?

2023-12-15 11:27:58 ET

2023 has been a roller coaster ride for major U.S. airlines, with American ( NASDAQ: AAL ) and United ( NASDAQ: UAL ) gaining 14% to 17 %, while Delta ( NYSE: DAL ) soaring a whopping 30 % as of mid-December.

Only Southwest Airlines ( NYSE: LUV ) descended, falling about 8 % by the middle of the month. However, these stocks were still trading about 25%-30% below their respective pre-Covid price levels.

Demand for air travel remained robust in 2023 even in the face of stick inflation, as years of pandemic-related restrictions meant people had a strong urge to stretch their legs.

However, rising fuel prices , new labor contracts , manufacturing issues , and indications of waning demand remained the major themes for the year.

That being said, the upcoming Christmas holidays have brought new cheer for the stocks. According to the AAA’s latest forecast , about 7.5M travelers are expected to take to the skies, exceeding 2019's record of 7.3M.

Airline booking trends have shown an acceleration in sales. BofA analyst Andrew Didora commented that the industry data aligns with the strong holiday demand commentary investors have been hearing for the airlines and is even better than what the firm had expected.

So how is the upcoming year looking?

Banking on the strength in international travel witnessed over the past two quarters, Morgan Stanley, in a November note, said, “We continue to believe that this (current travel demand) is not a ‘one-and-done’ revenge travel demand but a durable growth trend”.

MS noted that over the past 25+ years, the number of US passports issued per year noticeably increased after major events, and quoted that passports issued in 2023 rose 9% compared to 2022.

“We have seen similar trends in our consumer travel surveys and heard similar commentary during 3Q earnings that people want to travel internationally more now than ever before,” said MS analysts.

Meanwhile, analysts at Deutsche Bank said in a recent research note, “For 2024, we are forecasting a deceleration in industry top-line growth to 7% (from $222B to $238B) which is roughly half of this year’s year-over-year increase, but nonetheless a solid annual gain.”

The bank saw a continuation of many of the same operational and macroeconomic challenges that have frustrated the sector over the past several years. This includes delayed aircraft deliveries, supply-chain bottlenecks, under-staffed air traffic control facilities, constrained airports, and inflationary pressures.

“Like 2023, we expect to see major carrier profits outperform the low-fare carriers with operating and pretax margins of 9% and 7% compared with the low-fare carriers’ 3% and 2%, respectively,” the analysts noted.

Q4/2023 company forecasts

AAL: In October, American Airlines slashed its 2023 adjusted EPS forecast and projected FY non-GAAP EPS at $2.25-$2.50 compared to $3-$3.75 before. In Q4, American guided capacity increasing ~4.5%-6.5% YoY, while total revenue per available seat mile down 5.5%-7.5%.

UAL: The carrier saw Q4 adjusted EPS of $1.80 per share if its ban on flights to Tel Aviv only lasts through the end of October. However, if it is extended to the end of December, it is $1.50 per share, below consensus. United also noted that rising jet fuel prices would also weigh on Q4 results.

DAL: Delta reaffirmed its profit and revenue forecasts for 2023 earlier in December. The airline expects Q4 revenue to be 9% to 12% from a year ago, and EPS to land in a range of $1.05 to $1.30. For the full year, Delta sees revenue growth of up to 20%, and EPS of $6.00 to $6.25.

LUV: Southwest sees revenue per available seat mile being down 9% to 10% year-over-year in Q4 vs. a prior outlook for -9% to -11%. The airline continues to expect Q1 of 2024 capacity to increase in the 10% to 12% range, and full-year 2024 capacity to increase in the range of 6% to 8%.

Indications from quantitative measures, Wall Street, and SA community

Seeking Alpha’s Quant Rating system recommends American ( AAL ) as a Strong Buy , Delta ( DAL ) as a Buy , and United ( UAL ) as a Hold . Of the “Big 3”, Delta and United received an A+ on profitability, while American had an A, with their respective grades being unchanged in the past six months.

Major domestic carrier Southwest ( LUV ) is also rated a Hold and was graded a B on its profitability and valuation.

Meanwhile, the majority of the sell-side analysts surveyed in the last 90 days favored Delta over others, carrying a Buy or higher rating by about 20 analysts.

American Airlines and Southwest were recommended as a Hold by about 16 and 11 analysts, respectively.

Eyeing Delta’s Q4 earnings in January, Seeking Alpha author Muhammad Umair said, “The combination of increased demand, strategic revenue diversification, and effective cost management has positioned Delta Air Lines for a successful close to 2023.”

Eyeing Southwest's confident outlook for Q4, author Greathouse Research commented that “Over a span of three years, Southwest’s growth rate of 12.11% falls short when compared to the likes of Ryanair’s 37.49% and International Airlines Group’s 41.56%.”

More on American Airlines, Delta Air Lines, etc.

• Southwest Airlines: Assessing The Holiday Season's Flight Path
• Delta: Watch For Potential Pension Problems
• Delta Air Lines: Emerging A Bullish Setup
• Dividend Roundup: Alibaba, Amgen, AT&T, Southwest Airlines, and more
• Southwest Airlines issues confident outlook as it laps 2022 holiday operational meltdown

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