The airline industry is heading for a smooth take-off next year as it’s projected to see record revenue and traveller numbers.
A forecast by the International Air Transport Association expects the sector’s total revenues in 2024 to grow 7.6% year over year to a record US$964 billion, with around 4.7 billion people expected to travel in 2024, blowing past the pre-pandemic 4.5 billion recorded in 2019. Further, IATA says the industry is set to clock a staggering US$25.7 billion in net profits in 2024 on a 2.7% net profit margin.
As travel demand grows in North America, the Middle East and Europe, the following names in the airline sector are strategically positioned to win big. Investors may want to keep close tabs on these carriers and wait for a meaningful pullback to create an attractive entry point.
United Airlines (UAL) is a major U.S. network carrier focused more on international and long-haul travel than its large U.S. peers.
The airline is shifting gears from a pre-pandemic frugality to a new plan of fleet expansion, aiming to boost profitability and competitiveness. The airline is now buying new aircraft as part of a multi-year plan to “replace less-efficient and smaller jets to radically increase the average number of seats United can sell on an average flight, with more premium seats and leg room for those willing to pay up,” says a Morningstar equity report.
United is also adding plenty of cheap seats to attract more leisurely travellers and compete with lower-cost airlines on many of its routes, the report adds.
While the aviation sector is susceptible to the laws of gravity and economics, the outlook for U.S. airlines is quite rosy in the near term. Helped by the removal of travel restrictions and demand boost in the post-pandemic world, “airlines have recorded record revenue and profits,” says Morningstar equity analyst Nicolas Owens.
These conditions create a tailwind for the whole industry, and will take until at least 2024 to even out, he adds.
Longer term, United may return to 2019 levels of capacity in 2023 and revenue passenger miles could be approximately 30% higher in 2027, notes Owens, who pegs the stock’s fair value at US$35.
The largest domestic air carrier in the United States by passengers, Southwest Airlines (LUV) operates over 700 aircraft in an all-Boeing 737 fleet. The airline primarily operates a low-cost carrier business model specializing in short-haul, leisure flights.
“Southwest has stuck to its strategy of streamlining airline operations to maintain lower unit costs than its full-service rivals, which it passes on to customers in the form of cheaper tickets and a low-frills experience,” says a Morningstar equity report.
The severe pandemic-led hit to travel demand brought a sharp focus on liquidity. Airline investors face risks from higher debt and share dilution as airlines seek to improve financial health during depressed demand.
Investors may find it reassuring that Southwest boasts the best balance sheet of all the U.S.-based peers. “The best-positioned airlines are firms like Southwest, which came into this crisis with relatively little debt and an efficient cost base,” says Owens, pointing out Southwest was “more conservatively capitalized than peers” when the pandemic started.
Domestic leisure travel demand has since recovered considerably with the re-opened U.S. economy. “We forecast continued growth with a bustling economy and pent-up demand among consumers for travel,” says Owens, who puts the stock’s fair value at US$19. He cautions, though, that airlines have not fully recovered yet, as business travel and international travel are still below pre-pandemic levels.
Canadian flag carrier, Air Canada (AC) is the country’s largest airline, serving nearly 50 million passengers. It also operates a low-cost brand called Rouge. Air Canada is a sixth freedom airline, similar to Gulf carriers, which connects long-haul international routes to the U.S. via a layover in a Canadian airport.
“While Air Canada came into the COVID-19 crisis in better financial shape than many of its U.S.-based peers, its international exposure and extensive travel restrictions in the Canadian market placed it under comparably more financial stress,” says a Morningstar equity report, which forecasts the airline’s capacity and passenger load factors to return to pre-pandemic levels by 2024.
Like its peers, Air Canada saw a severe demand depletion during the COVID-19 outbreak, forcing it to dramatically cut capacity. However, “the worst is over for Air Canada, as border restrictions have been lifted, and we see a domestic leisure-led recovery for airlines and anticipate Air Canada can return to 2019 levels of capacity in 2024,” says Owens.
The airline, he adds, will bounce back when global travel starts up again in full swing and the Air Canada resumes its business model of acting as a fifth freedom carrier that accesses the global travel market.
“We anticipate 2023 capacity will be about 90% of 2019 levels and surpass that benchmark in 2024,” says Owens, who puts the stock’s fair value at $15.
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