This is an article about air travel companies. However, before I discuss airline stocks, I want to point out a stock market basic: the markets are a leading indicator, not a lagging one. So, the indices and stocks from specific industries recover well before a larger economic recovery. As such, in the pandemic-induced market meltdown this past year, the indices bottomed out towards the end of March 2020. However, the economy remains deep in recession.
Why is this important to note? If investors wait for economic recovery or a full-fledged industry bounce-back to invest in certain stocks, a significant part of the rally could already be over.
When it comes to the airline industry, fiscal year 2020 was disastrous. The International Air Transport Association (IATA) has estimated that the sector loss $118.5 billion last year and will probably lose $38.7 billion in 2021. Clearly, this is not a V-shaped recovery. However, things are starting to look up. The industry is betting on a traffic comeback in the second half of the year and that recovery can surprise on the upside if mass vaccination proves effective.
At the same time, it makes sense to be cautiously optimistic on airline stocks. A second wave of Covid-19 is already impacting travel within Europe. Therefore, I would not recommend a large exposure to these stocks. But I do see value from a 12 to 24-month investment horizon.
So, here are seven airline stocks that look interesting at current levels. In my view, it makes sense to board one or more of these picks.
- JetBlue Airways (NASDAQ:JBLU)
- Alaska Air Group (NYSE:ALK)
- Southwest Airlines (NYSE:LUV)
- Delta Air Lines (NYSE:DAL)
- American Airlines (NASDAQ:AAL)
- Hawaiian Holdings (NASDAQ:HA)
- Copa Holdings (NYSE:CPA)
7 Airline Stocks to Consider: JetBlue Airways (JBLU)
I believe that JetBlue Airways is one of the better positioned airline stocks from a financial perspective. JBLU stock has trended higher by about 42% in the last six months and I expect that rally to sustain.
Recently, the company announced results for the fourth quarter of 2020. There are several positives to talk about. For instance, JetBlue maintains a robust liquidity position of $3.1 billion. Further, with a debt-to-capitalization ratio of about 55%, the company has robust financial flexibility.
The airline also reported a daily cash burn of $6.7 million for Q4 2020, which was better than expected. Considering its cash position, JBLU has five quarters of cash buffer to sustain its burn rate. It’s very likely that the industry will turn around before that. In the report, CEO Robin Hayes assured investors that “demand trends will improve later this year.”
Finally, JetBlue has also been working on route expansion. The airline has already initiated more than 80 new routes. Once recovery gains traction, this is likely to support cash flow upside. Because of that, I expect fuel costs to increase in the coming quarters. But it’s unlikely to be a concern if capacity utilization increases meaningfully.
Overall, JBLU stock is attractive and can deliver robust returns in the next four to eight quarters.
Alaska Air Group (ALK)
ALK stock is another name among airline stocks that has moved well in the last six months. The company has strong fundamentals, especially compared to the likes of United Airlines (NASDAQ:UAL).
For Q4 2020, Alaska reported cash and equivalents of $3.3 billion. For the same period, the company’s debt-to-capitalization ratio was 61%. It’s also worth noting that the airline reported cash burn of about $4 million per day for the recent quarter. With its financial headroom, Alaska Air Group is well-positioned to navigate an extended period of downturn.
From a recovery perspective, Alaska Air Group also believes that “leisure will lead the recovery” and “business travel will [have] returned to only 50% of normal levels by end of year.” However, the airline has limited exposure to business and international travel. Therefore, going into 2022, ALK is likely to see meaningful improvement in capacity.
In terms of potential upside for this stock, 15 analysts have ALK at a median price target of $62, with 11 rating it as a buy. That price implies a potential upside of nearly 19% from current levels of around $52. Therefore, ALK stock is attractive for fresh exposure at current levels.
Southwest Airlines (LUV)
Recently, Morgan Stanley opined that Southwest Airlines is the “best positioned airline to capitalize on a second half recovery.” LUV stock has already moved higher by 49% in the last six months. However, Morgan Stanley has a price target of $59 for the stock. This would imply an additional upside of about 28% from current levels of around $46.
As the industry continues to face headwinds, it’s important to talk about specific fundamentals. Through one of the worst crises, Southwest Airlines has managed to maintain an investment-grade balance sheet. The airline ended Q4 2020 with a robust cash buffer of $14.3 billion. Further, with unencumbered assets of $12 billion, the airline is well-positioned to navigate the headwinds.
It’s also important to note that, for fiscal year 2019, Southwest reported a net margin of 10.3% even after the negative impact of Boeing (NYSE:BA) 737 Max groundings. That net margin was one of the best in the industry. I should also add that LUV remained profitable for 47 consecutive years through fiscal 2019.
With this track record and the current balance sheet health, LUV stock is certainly among the top airline stocks to consider.
Delta Air Lines (DAL)
The next name on my list of airline stocks is Delta Air Lines. Recently, Delta was in the news with plans to bring back “400 pilots to active flying status by this summer.” The company’s CEO, Ed Bastian, also believes that the airline is likely to return to profitability by summer of fiscal year 2021.
Given this optimism, I expect further upside for DAL stock, which has already moved higher by over 56% in the last six months. Morgan Stanley is already overweight on the name with a price target of $55. This would imply an upside of roughly 41% from the current $39 level.
From a liquidity perspective, Delta has also done well in the circumstances, ending 2020 with a total liquidity buffer of $16.7 billion. In addition, the airline has unencumbered assets of $9 to $10 billion. Finally, it’s worth noting that, for December 2020, Delta reduced its daily cash burn to $12 million. This is 90% lower than the daily cash burn it had in March 2020. Therefore, cost-cutting initiatives have yielded solid results and the current liquidity buffer will help the company navigate the rest of this crisis period.
As Delta moves toward profitability in the next few quarters, I expect this stock to continue its momentum. A pick-up in leisure travel in the second half of 2021 is also likely to ensure that DAL stock trades above $50.
American Airlines (AAL)
In the last six months, AAL stock has been another great performer when it comes airline stocks. Over that period, the stock has surged by 54%. However, over a one-year period, it’s still lower by some 36%. So, there’s still work to do. With the airline recently reporting better-than-expected earnings, though, I am optimistic that its rally will sustain.
Among several positives in its Q4 2020 results, American Airlines has reduced daily cash burn to $30 million — $70 million lower than where it was in April at the onset of the pandemic. Moreover, the airline also closed its quarter with liquidity of $14.3 billion. By the end of Q1 2021, its cash position is expected to be $15 billion. Therefore, there are ample funds to navigate through the challenges of current year — including debt repayments and capital expenditure.
Recently, American Airlines has also partnered with Alaska Air Group and JetBlue to enhance its network for customers in the Northeast and on the West Coast of the United States. Once passenger traffic increases, it will be easier to see the positive impact of this partnership. That pick-up in traffic is possible by the second half of the year.
Finally, the company also plans to utilize its excess liquidity for de-leveraging once cash flow growth resumes. So, I am positive on the outlook for the later half of 2021 as well as for 2022. In all probability, the worst is over for AAL stock.
Hawaiian Holdings (HA)
HA stock is also one of the more attractive airline stocks out there right now. However, I would avoid fresh exposure to the stock after an upside of over 76% in the last six months. Eight analysts offering 12-month price forecasts for Hawaiian Holdings have a median target of $17.50. HA currently trades at nearly $21. Therefore, I expect some correction and consolidation before the next leg of its rally.
A key positive for the airline, though, is the re-opening of Hawaii to tourism. With pre-travel Covid-19 testing eliminating the requirement for quarantine, it’s likely that this tourism will witness growth in the coming quarters. Plus, expansion of the airline’s network in North America will also likely yield positive results beyond the current year. That said, though, it remains to be seen whether or not Hawaiian can reduce its dependence on travel to its namesake on a relative basis.
In terms of cash buffer, the airline company reported cash and equivalents of $864 million as of Q4 2020. Further, the daily cash burn for the quarter was $1.7 million. Therefore, Hawaiian Holdings has enough money to make it through the rest of the year.
Copa Holdings (CPA)
Last on my list of airline stocks is CPA stock, another name that’s worth keeping on your investment radar. However, this stock is unattractive currently after a big upside of over 95% in the last six months.
A key reason for the strong rally is fundamentals. For Q3 2020, the airline reported a cash buffer of $1.3 billion. For the same period, the total debt was at $1.2 billion. Cash burn was also low at $36 million per month. Considering the present liquidity buffer, I don’t see significant leveraging in the current year.
It’s worth noting, though, that after nearly five months of no operations, the airline recommenced service to several destinations. By November, it had gradually expanded to 38 locations in a network that usually extends to 80 destinations across 33 countries.
In the coming months, I expect passenger traffic to witness steady growth. Operating level profitability is also likely to be the next upside trigger for CPA stock.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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