Best airline stocks to buy as the industry takes off again

Airline stocks are widely believed to be among the top beneficiaries of a global reopening. But there could be short-term turbulence, and some carriers are better than others.

  • By Deborah Yao,
  • Kiplinger
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The outlook for airline stocks continues to zip relentlessly higher ... even if they still face a few near-term bumps on the runway.

Leisure travelers are taking to the skies again as vaccinations roll out nationwide and pandemic cases decline, which are welcome glimmers of hope for a wide range of travel stocks, including carriers.

As a for-instance, the Transportation Security Administration reported that the number of travelers going through its checkpoints between March 18-24 rose by 160% year-over-year to 9.4 million. But to illustrate just how far we have to go, traffic remains 44% below 2019 levels.

The environment is sufficiently buoyant to justify upgrades on a slew of U.S. airline stocks by a number of analysts. That includes Deutsche Bank analyst Michael Linenberg, who says hospitalizations, COVID cases and vaccination rates are "all trending in the right direction."

He also is encouraged by the industry's "nonstop pursuit of numerous initiatives to mitigate the spread of COVID and increase the confidence of the flying public." The airline industry supports an international contact tracing program, as well as a pilot program of the digital Travel Pass from the International Air Transportation Association that would match itineraries to local COVID testing requirements.

Read on as we look at nine airline stocks with a brighter outlook in 2021. One thing to take into consideration, however, is that airlines have already lifted off in 2021, with the Dow Jones U.S. Airlines Index up 26% year-to-date. This froth makes the group susceptible to choppy trading on short-term concerns. And not all carriers are created equal; the best airline stocks are flying on far sturdier wings than their peers.

We'll look to identify the strongest candidates, which might be even more attractive on quick dips.

Data is as of March 24. Analyst ratings provided by S&P Global Market Intelligence.

American Airlines

  • Market cap: $13.6 billion
  • Analyst ratings: 2 Strong Buy, 0 Buy, 6 Hold, 4 Sell, 7 Strong Sell
  • Year-to-date performance: 38%

Despite a nearly 40% run-up in American Airlines (AAL), shares still trade at a lower valuation than several of its smaller competitors. It remains one of the worst airline stocks of the past three years, off 44% in that time versus a 17% loss for the broader airline index.

And it's not popular among analysts, with a consensus Sell rating, according to S&P Global Market Intelligence.

Hampering investors' optimism over the past few years has been a hefty debt load that's larger than those of its peers. Fitch Ratings, which downgraded America's senior secured debt ratings from B+ to B in early March, notes that AAL ended 2020 with $41 billion in debt including lease obligations. "(That) is likely to increase to $45 billion or more by YE 2021, leading to leverage be sustained at levels that constrain the (Long-Term Issuer Default Rating) to 'B-' at least through 2022.

But there was some good news in Fitch's report, too. The credit rating agency removed the company from Rating Watch Negative following several "positive" events: American's liquidity improved due to continued federal aid, and the vaccination rollout is expected to lead to a "meaningful rebound" in air travel in 2021. That means American is less likely to continue to burn cash for a prolonged period.

At the end of 2020, the carrier had $7 billion in cash and short-term investments plus another $7 billion in federal aid from the CARES Act. To conserve funds, American has frozen share buybacks and dividend payments for now.

Deutsche Bank's Linenberg is in American's small bull camp. In the past, he noted, airlines that did not join economic recoveries were ones with broken business models, insufficient liquidity, and whose operations cannot service their financial obligations. That's not true for American and other airlines the bank covers, he says.

Stifel analyst Joseph DeNardi, who rates AAL at Hold, raised his fiscal 2021 and 2022 revenue estimates for American but cut his earnings per share (EPS) estimates for both years. He does, however, mention a bright spot in the carrier's business: its marketing operations.

Carriers and banks partner on co-branded credit cards. Travelers use these credit cards to earn miles. When they redeem the miles for travel, the banks buy miles at a good profit to the carriers. For 2020, American had $1.83 billion in marketing fee revenue from its loyalty program. This compares to Marriott's (MAR) $1.55 billion in net fee revenue in 2020, DeNardi says. And yet, American's marketing business is valued at 16 times 2021-23 EBITDA (earnings before interest, taxes, depreciation and amortization) – a discount to Marriott's valuation.

United Airlines

  • Market cap: $16.9 billion
  • Analyst ratings: 7 Strong Buy, 2 Buy, 6 Hold, 3 Sell, 2 Strong Sell
  • Year-to-date performance: 24%

United Airlines (UAL) is another so-called legacy U.S. airline with thousands of domestic and international routes. And just like American (and Delta, which we'll discuss in a moment), UAL stands to benefit from a recovery in air travel, especially in business and international flights.

But what sets United apart is a knack for keeping expenses down. Morningstar calls United "the lowest unit cost legacy carrier since 2016."

Since the pandemic started, United has been cutting spending and reducing capacity to cope with decreased revenues, says Argus Research analyst John Staszak (Hold). As such, United is "well-positioned for an eventual recovery in airline traffic." Management's actions are expected to result in a "lower daily cash burn rate than that of other legacy airlines," he adds.

In the fourth quarter of 2020, United cut its cash burn to $19 million from $24 million a day. For the first quarter, the carrier expects daily cash burn of $10 million to $20 million. United plans to cut another $2 billion in annual costs by 2023. Meanwhile, United's long-term debt stood at around $5 billion at the end of last year.

Here's a growthier goal: United aims to double its loyalty mileage program's EBITDA over the next few years, according to Stifel's Joseph DeNardi, who also rates UAL at Hold. In 2019, EBITDA was $1.8 billion. "Undoubtedly, that is a far, far more compelling and valuable source of earnings power improvement than (the cost cuts)."

To be sure, United's shares are up 26% year-to-date. But CFRA's Colin Scarola (Buy), who's more bullish than his aforementioned peers, sees more upside to come. "We are now seeing the leading edge of a large pent-up demand wave," he says. He recently raised his 12-month price target to $66 (23% upside), which he pointed out still is a third below the stock's pre-COVID high.

The Street collectively doesn't see UAL as one of the best airline stocks right now, however. Nine analysts give shares some sort of Buy rating, but another six say to Hold and five call it a Sell.

Delta Air Lines

  • Market cap: $28.8 billion
  • Analyst ratings: 7 Strong Buy, 3 Buy, 11 Hold, 0 Sell, 1 Strong Sell
  • Year-to-date performance: 13%

Among the three legacy airline stocks, Delta Air Lines (DAL) is seen to have the strongest brand because it is able to attract high-yielding business travelers through product segmentation and credit card partnerships, particularly with American Express (AXP), Morningstar says. Amex pays top dollar for Delta miles that are given to business travelers, who often use mileage to upgrade flights if their employers are unwilling to pay.

And even though a recovery in business travel is challenging for now, Delta is well-positioned once it rebounds.

Delta indicated in its last earnings call that most corporate customers expect demand to rebound to 2019 levels by 2023, Raymond James analyst Savanthi Syth says. Moreover, the increased mobility of employees able to work from anywhere could help business travel return, but perhaps in a different form. Delta is continuing to focus on the corporate and premium leisure traveler, betting that its brand, hubs and sales efforts will give it a competitive edge in the recovery.

Delta's game plan during the pandemic also helps: it focused on serving interior hubs (Atlanta, Detroit, Minneapolis/St. Paul, Salt Lake City) due to their cost advantages and traffic flow within airports that lowers its dependence on state reopenings. The airline whittled down the number of its focus cities as well, from mid- to high single digits to just two: Austin, Texas, and Raleigh, N.C. These two fast-growing cities have a high concentration of business traffic, Raymond James analysts say. (Focus cities are those where no global or legacy carriers have a hub.) Delta had $14 billion in cash and short-term investments at the end of 2020, versus long-term debt and capital leases of $29 billion. And Argus Research (Buy) expects the carrier to return to profitability in the second half of 2021 and into 2022. Broadly speaking, analysts are warm on the stock, with a consensus Buy rating.

Southwest Airlines

  • Market cap: $33.7 billion
  • Analyst ratings: 12 Strong Buy, 4 Buy, 3 Hold, 1 Sell, 0 Strong Sell
  • Year-to-date performance: 24%

If there's one airline strongly poised to benefit from a recovery led by leisure travelers, it's Southwest Airlines (LUV). The largest domestic U.S. airline has made a name for itself by focusing on offering low-cost fares in the leisure market, all wrapped up in a fun package. As business travel recovers, Southwest's low fares could take a share of this market as companies seek to reduce employee travel costs, Morningstar analysts say.

Leisure passenger bookings are improving, and so are the carrier's expectations for March and April operating revenues. The average core cash burn is now seen coming in at $14 million a day for the first quarter, down from the $15 million initially forecast. BofA Securities adds that Southwest has an industry-leading balance sheet and strong competitive position.

They're hardly alone. LUV is one of the best airline stocks of the bunch according to Wall Street's pros, who give it a clean consensus Buy recommendation. Just one analyst is betting against the company at the moment.

"It feels like it's … the beginning of the end," Southwest CEO Gary Kelly said in a March 15 interview with The Washington Post. "There are very clear signs that our business is picking up." He said he hoped that by June, business will have recovered enough that the airline has a chance of "breaking even."

As for business travel, Kelly said it takes five years on average to recover from recessions, although it could be much longer as employees have gotten used to working virtually. (At Southwest, business travel is down 90%.) But Kelly said offering low-cost fares helps the airline do better in such an environment.

LUV is pursuing other revenue streams to offset weakness in business travel. For the first time in 2020, Southwest began participating in other global distribution systems to make it easier for companies to book travel on the airline. Southwest historically has sold its tickets through its down distribution channel. "So, I would expect our share of (business travel) will go up significantly," Kelly adds.

JetBlue Airways

  • Market cap: $5.9 billion
  • Analyst ratings: 4 Strong Buy, 2 Buy, 7 Hold, 2 Sell, 1 Strong Sell
  • Year-to-date performance: 29%

JetBlue Airways (JBLU) is another low-cost airline focused on domestic markets with additional perks such as assigned seating and in-flight entertainment. The pandemic that kept travelers at home have hammered JetBlue; nevertheless, a leisure-led travel rebound is helping to lift the airline's wings as well.

"We all want things to get back to normal. I certainly feel optimistic that that time is coming soon," CEO Robin Hayes said at the JPMorgan Industrials Conference on March 15. "We're seeing good revenue momentum. (And while it's right to be a bit cautious), there is a lot of pent-up demand."

Hayes said JetBlue has "definitely seen a lot of momentum coming into March." For example, heading into the month, revenue was about $6 million a day. The average revenue take in March is now around $10 million to $12 million, he says. "That shows you how much acceleration there has been." (To break even, JetBlue needs to bring in $13 million to $15 million a day.)

The current uptick in demand is giving Hayes confidence that the airline industry "can start to be cash positive" in the short- to medium-term.

Wall Street isn't quite as exuberant. Argus Research's Colin Scarola, for instance, is among a number of analysts calling JBLU shares a Hold on valuation concerns.

"We expect JBLU to breakeven again in Q3 2020, with the help of successful vaccines boosting travel demand," he says. "However, JBLU's debt has more than doubled since December, which will cause earnings to need 4-plus years to fully recover pre-pandemic level, in our view."

Alaska Air

  • Market cap: $8.0 billion
  • Analyst ratings: 9 Strong Buy, 2 Buy, 3 Hold, 0 Sell, 0 Strong Sell
  • Year-to-date performance: 26%

Wall Street is looking at Alaska Air (ALK) with a little bit more favor than other carriers. It has an average recommendation of Buy among 14 analysts, and it's one of the best airline stocks by its composite rating, according to S&P Global Market Intelligence.

BofA Securities, which has a Buy recommendation on the airline, cited its "solid" liquidity position relative to peers and a discounted share price.

"Our recommendations continue to reflect our preference for airlines with solid balance sheets, good relative margins, leisure exposure and the ability to come out of the pandemic in a position of strength," says BofA analyst Andrew Didora.

He says momentum continues to drive airline stocks higher in the near term, but he acknowledges there are risks to fundamentals in a recovery "when most airlines have enterprise values higher than pre-pandemic (times)." Moreover, jet fuel prices are nearly back to pre-COVID levels, but demand is still more than 60% below – this will affect industry earnings.

CFRA analyst Colin Scarola (Buy) lauds the Alaska Air's conservative balance sheet and its historically high cash generation per plane that "will make it among the first U.S. airlines to recover profitably this year." Moreover, he said, the airline has "modest" equipment purchase commitments this year and in 2022, meaning it is "likely to generate meaningful free cash flow" next year even if earnings remain way below pre-pandemic highs.

Finally, ALK is expected to "materially" increase free cash flow beyond next year as air travel demand fully recovers from the pandemic and grows with global economic integration, the analyst wrote.

Spirit Airlines

  • Market cap: $3.3 billion
  • Analyst ratings: 4 Strong Buy, 1 Buy, 6 Hold, 1 Sell, 1 Strong Sell
  • Year-to-date performance: 42%

With bigger competitors cutting fares during the pandemic, Spirit Airlines (SAVE) is getting some stiff competition for its budget fares. Demand in February turned the corner later than expected for the no-frills airline, but business caught up in March, allowing Spirit to maintain its business outlook for the first quarter.

Importantly, the upturn in March carries "favorable implications" for the second quarter, says Raymond James.

Spirit expects capacity to return to 2019 levels by this summer, which implies a 21% to 24% growth in seats. However, one disadvantage is that Spirit has less room to cut costs than its competitors given its already lean operations. One area of savings, although for the longer term, is the increased use of fuel-efficient next-generation aircraft.

Spirit is what's called an "ultra low-cost carrier" (ULCC) with industry-leading low-cost structure that often lets it offer substantially lower airfares than its competitors. It makes around half of its revenue from ancillary sales such as baggage check-in, seat selection and other traditionally included features.

CFRA (Hold) is among several analysts that are cautious on this airline stock. Analyst Colin Scarola cited "severe" fourth-quarter 2020 cash burn of $137 million in part as employee compensation costs rose 3% in the quarter from a year ago, compared to a decline of 30% for Southwest and 17% for American Airlines.

Scarola also said Spirit has equipment purchase commitments averaging $830 million for 2021 to 2025 vis-à-vis peak operating cash flow of $551 million before the pandemic.

"We are concerned that Spirit will continue to burn cash for many years," Scarola says.

Allegiant Travel

  • Market cap: $3.9 billion
  • Analyst ratings: 7 Strong Buy, 2 Buy, 7 Hold, 0 Sell, 0 Strong Sell
  • Year-to-date performance: 24%

Allegiant Travel (ALGT), which operates Allegiant Air, is the little airline that could. And as one of the most profitable carriers in the industry, Allegiant is considered one of the best airline stocks right now, given a high composite analyst rating that includes no Sell calls.

"Not only was the December (2020) quarter loss per share materially narrower-than-expected, but the company managed to post positive adjusted EBITDA of $35 million for 2020, an achievement that very few publicly traded airlines around the world will be able to claim," Deutsche Bank analyst Michael Linenberg wrote in February. He upgraded the stock to Buy from Hold and raised his 2021 EPS estimates.

Allegiant operates a unique business model in that it views airline seats as commodities that open opportunities to develop related businesses with higher margins that are less capital-intensive: hotel rooms, car rentals and the like. This view has garnered admirers on Wall Street.

CEO Maury Gallagher's vision is "how every other airline executive should view their business," Stifel's Joseph DeNardi (Buy) says.

Like the other airlines, Allegiant sees travel demand improving. But as its competitors retrench from serving cities, Allegiant has expansion on its mind. According to a March 5 note from Raymond James, Allegiant sees around 1,000 potential new markets it could serve, up from 600 it identified before COVID. About 80% of these new markets don't have much competition, and half of them already connect to an Allegiant market.

Mesa Air

  • Market cap: $445.3 million
  • Analyst ratings: 1 Strong Buy, 1 Buy, 3 Hold, 0 Sell, 0 Strong Sell
  • Year-to-date performance: 88%

Mesa Air (MESA) is a regional carrier that operates American Eagle, United Express and DHL Express flights.

Mesa is in a good spot after snagging a new United contract prior to COVID and extending its agreement with American for five years, according to a Feb. 17 BofA Securities research note. As such, Mesa is "well positioned to help its partners capitalize on a return to domestic travel, particularly as the network airlines should focus more on hub traffic."

Moreover, U.S. government aid was a big support to the carrier, allowing it to refinance high-cost debt. It received more than $140 million in grants and $195 million in loans. "The government support meaningfully helped Mesa's balance sheet at a time when other airlines were issuing capital to get through the crisis," BofA said. As such, "balance sheet risk has been meaningfully reduced at a time when capex (capital expenditures) needs are small," the report added. BofA upgraded the stock to Buy from Underperform.

Looking to the future, Mesa and United recently announced they were investing in Archer Aviation, which develops urban mobility aircraft, or "flying taxis." United has ordered 200 of these aircraft, according to a March 4 note from Raymond James. These vertical take-off and landing aircraft can reduce carbon emissions, for example, by up to 50% per trip between Hollywood and Los Angeles International Airport compared to cars. The target cost is $3.30 per passenger mile based on four passengers, making it competitive with ride-sharing, the report said.

"We do not see a near-term benefit to earnings," Raymond James analysts say. "However, potential for electric aircraft to lower pilot training costs and to open up small short-haul markets long abandoned by regional airlines could provide longer term earnings growth."

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