Despite macroeconomic challenges, the airline industry is poised for growth with robust travel demand. The industry is expected to witness significant revenue growth in the upcoming quarters driven by increased leisure and revived business travel. Considering these factors, I think it would be wise to add fundamentally strong airline stocks Southwest Airlines Co. (LUV) and Delta Air Lines, Inc. (DAL) to one’s watchlist.

Before diving deeper into their fundamentals, let’s discuss what’s happening in the airline industry.

The airline industry rebounded strongly from pandemic restrictions, fueled by pent-up demand for leisure travel. Investors’ interest in the sector is evident from the U.S. Global Jets ETF’s (JETS) 15.6% returns over the past month.

IATA reported that the passenger demand recovery persisted in October, with total global traffic reaching 98.2% of pre-COVID levels, marking a 31.2% year-over-year increase. International traffic climbed 29.7%, and international revenue passenger kilometers (RPKs) reached 94.4% of October 2019 levels.

There has been increased demand for hotels, airlines, and cruise lines in the past two years. With a surge in visitors and heightened U.S. travel spending, the U.S. Travel & Tourism sector is projected to contribute $2.2 trillion to GDP in 2023, supporting 17.4 million jobs, as per the WTTC’s 2023 global trends report, with expectations of surpassing these results in 2024.

Likewise, in 2024, IATA forecasts a slight improvement in the airline industry’s net profit to $25.7 billion (2.7% margin) from an expected $23.3 billion (2.6% margin) in 2023. Despite anticipated operating profits of $49.3 billion, global net profitability is projected to stay below the cost of capital, reflecting significant regional financial variations.

Considering these conducive trends, let’s analyze the fundamentals of the two watchlist additions from the Airlines industry, beginning with the second choice.

Stock #2: Southwest Airlines Co. (LUV)

LUV operates as a passenger airline company that provides scheduled air transportation services in the United States and near international markets. The company operates a total fleet of 770 Boeing 737 aircraft and serves 121 destinations in 42 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near-international countries.

On November 2, 2023, LUV announced an offtake agreement with USA BioEnergy, LLC, for 680 million gallons of sustainable aviation fuel (SAF) over 20 years. This move aims to generate 2.59 billion gallons of net-zero fuel, cutting 30 million metric tons of CO2.

LUV’s Managing Director of Fuel Strategy and Management, Michael AuBuchon, stated that the agreement with USA BioEnergy is a significant step in developing its sustainable aviation fuel (SAF) portfolio. He looks forward to expanding its strategic relationship with USA BioEnergy and possibly buying more SAF from them, helping it achieve its sustainability initiatives.

In terms of the trailing-12-month Capex/Sales, LUV’s 16.51% is 453.7% higher than the 2.98% industry average. However, its 1.95% trailing-12-month net income margin is 67.9% lower than the industry average of 6.09%. Furthermore, the stock’s 22.93% trailing-12-month gross profit margin is 24.3% lower than the industry average of 30.28%.

For the fiscal third quarter that ended on September 30, 2023, LUV’s total operating revenues increased 4.9% year-over-year to $6.53 billion. Its operating income, excluding special items, was $224 million, representing a decline of 47.3% year-over-year.

However, the company’s net income, excluding special items, and net income per share, excluding special items, stood at $240 million and $0.38, respectively, representing a decline of 24.1% and 24% year-over-year.

Analysts expect LUV’s revenue for the quarter ending December 31, 2024, to increase 8.9% year-over-year to $6.72 billion. On the other hand, its EPS for the quarter ending March 31, 2024, is expected to remain negative. Over the past month, the stock has gained 14% to close the last trading session at $28.88.

LUV’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It is ranked #18 out of 28 stocks in the Airlines industry. It has a C grade for Growth, Value, Momentum, and Quality. Click here to see LUV’s Stability and Sentiment ratings.

Stock #1: Delta Air Lines, Inc. (DAL)

DAL provides scheduled air transportation for passengers and cargo in the United States and internationally. The company operates through two segments: Airline and Refinery.

In terms of the trailing-12-month Return on Common Equity, DAL’s 49.23% is 300.4% higher than the 12.30% industry average. Likewise, its 10.34% trailing-12-month Capex/Sales is 246.9% higher than the industry average of 2.98%. On the other hand, the stock’s 21.26% trailing-12-month gross profit margin is 29.77% lower than the industry average of 30.28%.

DAL’s operating revenue for the third quarter that ended September 30, 2023, increased 11% year-over-year to $15.49 billion. Its adjusted operating income rose 31.6% year-over-year to $1.96 billion. Additionally, the company’s adjusted net income and EPS increased 35.4% and 34.4% over the prior-year quarter to $1.31 billion and $2.03, respectively.

Street expects DAL’s revenue for the quarter ending December 31, 2023, to increase 3.2% year-over-year to $13.86 billion, while its EPS for the same quarter is expected to decrease 21.9% year-over-year to $1.16. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has gained 9.8% to close the last trading session at $40.23.

DAL’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, translating to Neutral in our proprietary rating system.

It has a C grade for Growth, Momentum, and Quality. Within the same industry, it is ranked #13. In total, we rate DAL on eight different levels. Beyond what we stated above, we also have given DAL grades for Value, Stability, and Sentiment. Get all the DAL ratings here.

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DAL shares fell $0.23 (-0.57%) in premarket trading Tuesday. Year-to-date, DAL has declined 0.00%, versus a 0.00% rise in the benchmark S&P 500 index during the same period.

About the Author: Abhishek Bhuyan

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments. More...

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