News

Turbulence Ahead for Airline Stocks

James L. Flint

• October 04, 2023

It has been a challenging period for airline stocks, with rising fuel prices and the end of the peak summer season. According to Citi analysts, this turbulence is expected to continue into early 2024.

In light of this, the analysts, led by Stephen Trent, have lowered their earnings estimates and price targets for the major U.S. airlines: Delta Air Lines (DAL), United Airlines Holdings (UAL), Southwest Airlines (LUV), and American Airlines Group (AAL).

While Delta and United stocks are still rated as "Buy," Southwest and American shares are now labeled as "Neutral."

In a research report released on Wednesday, the analysts pointed out that the current "mismatch" of high oil prices, weakening major economies, and a strong dollar may not be a long-term trend. However, they believe that these factors could persist until at least early 2024.

According to the analysts, Delta and United appear to be the strongest among the Big Four airlines due to their international exposure and robust co-branded card spend.

The new price target for Delta is $56 (previously $64), while United's target is $84 (previously $76). Southwest's price target has dropped to $28.50 (previously $32.75), and American's target is now $13 (previously $15.25).

The analysts also highlighted some specific challenges facing Southwest and American. Southwest is currently grappling with efforts to improve operations and a pay dispute with its pilots. Meanwhile, American faces potential vulnerabilities due to its balance sheet and higher capital expenditure expectations for the coming year.

With earnings season on the horizon, starting with Delta next week, the analysts emphasized that each airline's demand outlook will be crucial. Based on Citi's estimates, Delta and United are expected to maintain the strongest demand trajectories among the Big Four.

The U.S. Global Jets exchange-traded fund (JETS) has already declined by 26% since its peak in July. As a result, the fourth-quarter forecasts will be closely watched, as any potential recovery in these stocks towards the end of the year may hinge on them.