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10 Best Airline Stocks to Buy in 2022

Daniel Rogers

May 27, 2022 14:33

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Companies within the airline business provide a variety of air transportation and travel services for passengers and freight. The company's services include air transportation, aircraft leasing, hotel reservations, automobile rentals, and trip management. Southwest Airlines Co. (LUV), Delta Air Lines Inc. (DAL), and United Airlines Holdings Inc. are some of the most recognizable brands in the airline business (UAL).

 

As the COVID-19 omicron variant epidemic has diminished, airline reservations have increased significantly. However, the price of jet fuel has soared in recent weeks due to Russia's invasion of Ukraine, endangering the airline industry's total recovery.

 

The recovery from the COVID-19 epidemic has offered a unique opportunity for investors in airline stocks, given the decline in airline stock prices and the anticipated increase in travel demand.

 

In 2021 alone, the airline sector will generate $471,8 billion in revenue. When you have such a vast industry, you have enough opportunity to create significant stock market profits. Here are the most undervalued airline stocks.

Understanding the Airline Industry

Before purchasing any stock, investors must be familiar with several airline-specific words. Here is what you should know: 

RASM

RASM, which stands for revenue per available seat-mile, is a measure of an airline's profitability. The seat miles of a firm is the number of available seats multiplied by the distance flown by the company's aircraft. RASM for an airline is calculated by dividing revenue by seat miles.

 

RASM is essential because all flights have different pricing and cost structures based on several variables, including flight distance and aircraft type. Looking only at total revenues or costs will not provide a whole picture.

 

The RASM of an airline indicates if it is selling tickets at any price to fill seats or whether it has sufficient pricing power to sell seats at a profit. As an investor, your attention should be on the airline that can do so with the highest yields, even if both carriers may have total flights.

CASM

CASM is the overall expenditures of an airline divided by the number of available seats and multiplied by the number of miles flown. It monitors costs similarly to how RASM measures revenue. During the year in question, if Foolish Airlines had total costs of $24 billion, its CASM would be $0.12.

Load Factor

Load factor indicates how efficiently an airline fills its seats. It suffices to state that 60 of 79 seats were occupied for a single flight. However, for a large airline, this description is incomplete due to variances in flight durations. Airlines determine their systemwide load factor by assessing the number of occupied seats per flight mile. Major airlines will offer this information in earnings releases and conference calls. However, investors may compute it at home by dividing revenue passenger miles by available seat miles, as described above.

Why Should You Invest in Airline Stocks?

Travel Inventory Cannot Be Restricted 

The previous year or two have demonstrated that the need for holidays cannot be repressed for long. As vaccines were administered and crossings were reopened, the "revenge travel" campaign gained traction.

 

People are keen to go after months of being confined to their city and isolated from loved ones who reside elsewhere. Analysts have called 2022 the year of the Greatest Of All Trips due to the convergence of exotic holidays, reunion travel, wilderness and nature experiences, nostalgia travel, fantasy vacations, and more.

 

Even Omicron was unable to destroy the aviation resurgence. According to experts, every time, reservations decrease due to a new strain, and a more significant increase follows when illness rates decline again. IATA predicts that the overall number of passengers will increase from 2.3 billion in 2021 to 3.4 billion in 2022, while the International Travel and Health Insurance Journal (ITIJ) predicts that international travel expenditures will increase by 94% in 2022.

The Airline Industry is Learning from the Pandemic

Despite the perception that private car travel is safer and more hygienic, air travel is gaining ground. While business was slow, leading airlines grabbed the opportunity to deploy contactless check-in, boarding, in-flight entertainment, and food orders to boost consumer confidence.

 

Meanwhile, airlines are integrating data analytics to comprehend the preferences of post-covid airlines better and are putting these insights to work to enhance their offers. IATA expects that, as a result, airlines will return to profitability by 2023.

 

This proactive action helps to reassure both travel stock investors and travelers. Some astute investors viewed the 2020 airline stock drop as a perfect chance to buy the top airline stocks at bargain prices.

Are Airline Stocks Profitable?

The airline sector is still cyclical, but the pandemic showed that companies can now weather difficult operational conditions without going bankrupt.

 

If you are optimistic about the long-term demand for travel, investing in a well-managed airline is an excellent way to ride along.

10 Best Airline Stocks

1. American Airlines 

American Airlines (AAL, $20.52), the largest airline globally, was in the process of paying back debt when the epidemic interrupted its deleveraging plans. According to Fitch Ratings, the carrier's $41 billion in debt by the end of 2020 was more than that of its competitors due to years of capital expenditures and share buybacks.

 

However, although not being out of the woods, the company's financial situation started to improve. In June, Fitch changed its outlook for the airline from Negative to Stable to reflect its improving finances, a comeback in passenger volume, and a possible industry boost as more people receive vaccinations.

 

Currently, the United States is taking measures to organize its finances by cutting debt and expenditure. According to Raymond James analyst Savanthi Syth, it is speeding debt repayments intending to pay off $15 billion in debt by 2025's end. She predicts that liquidity will decline from $21 billion at the end of the second quarter to $10 billion to $12 billion the following year. The stock is rated Market Perform by Syth, similar to a Hold recommendation.

 

AAL will spend $2.6 billion a year on capital expenditures in 2022 and 2023, which is much less than Syth's projections for Delta Air Lines (DAL) and United Airlines (UAL).

 

The airline's actions respond to its pessimistic estimate for a third-quarter deficit. In contrast, traditional competitors are directing their businesses to profitability despite a less favorable regional mix, resulting in a slower revenue recovery compared to the United States.

2. United Airlines

United Airlines (UAL, $45.68) is the most globally-focused of the three legacy airline companies, with approximately 40 percent of its 2019 revenue coming from overseas travelers.

 

Despite the decline in foreign travel brought on by the pandemic, United survived last year's steep fall in business because of its strategy of stringent cost management.

 

According to a recent customer poll, more than 80 percent of UAL's MileagePlus members had been vaccinated. UAL's management was reportedly "optimistic" that travel will continue to rebound despite the rise in Delta illnesses. As more borders reopen in Europe in 2022, the United anticipates a rebound in international and business travel, with Asia lagging in 2023.

 

Moreover, although United's business travel patterns remain sluggish, they are improving. It is presently down around 60 percent compared to 2019, improving the 90 percent decline in previous months. United is "positioned to be the first U.S. network carrier to recover to 2019 capacity levels." However, its $17 billion in projected capital expenditures through 2023 would reduce its cash flow and limit its ability to pay down debt, restricting its "value creation potential."

3. Delta Air Lines

This airline is the driving force behind most of the industry's recent innovations. Delta, located in Atlanta, initiated a phase of consolidations that helped stabilize the industry by acquiring Northwest Airlines in 2008. It has revised its pricing to be more competitive with bargain airlines, and Delta even purchased an oil refinery to guarantee its availability of jet fuel. Where Delta moves, so do its competitors.

 

Post-pandemic Delta's healthy balance sheet and reasonably decent labor relations make it an excellent candidate to be among the first international airlines to recover entirely.

4. Southwest Airlines

Southwest Airlines was the first inexpensive airline, but it is now one of the industry's heavyweights and no longer a pioneering upstart. The Dallas-based airline is the only primary carrier that has never filed for bankruptcy, and its streamlined operations have a history of keeping profitable even while competitors are struggling.

 

Southwest has demonstrated that it can withstand delays over the years, even though the airline is now attempting to reconstruct its schedule amid labor issues. Southwest has the most delicate balance sheet in the industry and is favored by investors for its potential to endure.

5. Alaska Air Group Inc. (ALK)

Alaska Air is a midsize airline with Seattle as its principal hub. Before the pandemic, shares were valued at around $70 apiece, $55 in the summer of 2021, and $47 at present. This is not because ALK had a challenging time during the epidemic; American and other airlines had to take on additional dilution and debt to survive. However, the market is now punishing Alaska for its destinations. Alaska provides many services to California and Hawaii in addition to its state. Due to extensive local COVID-19 regulations, the recovery of markets like Hawaii has been sluggish. However, the market may now be sleeping on ALK. Historically, the airline has had superior management and well-run operations. Tourism markets, like Hawaii, will recover, but ALK's robust corporate culture should endure. Additionally, the airline is updating its fleet, resulting in substantial fuel savings in the future.

6. JetBlue Airways

JetBlue Airways (JBLU, $15.18) is a low-cost airline servicing primarily U.S. markets whose stock price has recently taken a beating. However, the selling may have been excessive.

 

With JetBlue's management saying that the airline would seek investment-grade credit ratings by 2024, the company anticipates being in a stronger financial position to repay debt. In addition, there is a natural, physical deleveraging narrative here.

 

The second quarter for JetBlue had both good and negative news. The positive information was that fares have recovered to 2019 levels, and other revenue efforts are ramping up; the bad news was that JBLU's CASM projection was higher than anticipated. Nonetheless, the positive exceeded the negative.

7. Controladora Vuela Cia de Aviacion (VLRS)

It has become rapidly apparent that airlines with an emphasis on tourism perform better than traditional carriers. Mexico has also been one of the most successful aviation markets in the Americas. Passenger volume has already returned to or exceeded 2019 levels at some Mexican airports. It is a fantastic moment to be a Mexican budget airline when these factors are together. Volaris, or Controladora Vuela Cia de Aviacion, is Mexico's largest and most successful airline. It received a substantial boost from the recent industry crisis when competitor Interjet ceased operations. Aeromexico, the national airline of Mexico, has filed for bankruptcy restructuring. Volaris is the leading low-cost airline in Mexico, serving one of the world's most rapidly reopening tourism destinations. The shares of Volaris have already risen considerably, but they may still have the opportunity to advance.

8. Defiance Travel ETF (CRUZ)

If you are confident that the travel industry will revive, but you do not know which travel equities will be a part of that recovery, a travel ETF is an excellent choice. It is tough to choose only a few of the finest travel stocks to purchase, and investing in a small number of companies increases the dangers.

 

A travel or airline ETF, such as Defiance's CRUZ, provides broad exposure to various airlines, hotels, cruise lines, and other travel firms, mitigating your exposure to the risk of holding just one or two stocks while letting you capitalize on the increasing travel sector.

 

BlueStar Global Hotels, Airlines, and Cruises Index is a rules-based, weighted index of firms in hotels, airlines, and cruise industries. CRUZ has an expense ratio of 0.45% and is trading at $19.32 a share. 

9. Copa Holdings SA (CPA)

Copa is another Latin American airline poised to prosper in a quickly changing environment. Latin American governments supplied far less assistance to their airlines than the United States. Consequently, during COVID-19, Aeromexico, Latam Airlines, and Avianca filed for bankruptcy. All continue to fly, but bankruptcy might hinder a company's competitiveness. This creates a significant potential for Copa Airlines of Panama. Due to Panama's central location, Copa can increase capacity in Mexico, Colombia, Peru, and other regions where struggling carriers may be forced to reduce operations. Copa also benefits from high-margin flights in its Central American area, where cheap airline competition is low. The closing price of Copa shares on May 18 was $68.09, a significant decrease from their pre-pandemic price of $110. As the economies of Latin American nations begin to recover, this might alter rapidly.

10. Ryanair Holdings PLC (RYAAY)

Ryanair is the dominant low-cost carrier in Europe. Like Southwest in the United States, Ryanair entered COVID-19 in solid financial shape and has survived the epidemic without suffering a catastrophic financial hit. Indeed, the airline is quickly recovering. Ryanair has gained market share for years due to its meager prices. The epidemic should increase Ryanair's competitive edge as European legacy airlines struggle with the combined weight of big debt loads and vulnerability to the faltering business traveler category. Over the previous decade, Ryanair shares have quadrupled, reaching a high of over $120 per share in early 2018, making it one of the few long-term winners in the airline business. This downturn might be an excellent time to invest in Ryanair, which ended on May 18 at $82.98 per share.

Final Thoughts

Overall, the airline sector is poised to recover. As the last wave of COVID cases decreases and an increasing number of Americans get immunized, demand for air travel is projected to increase dramatically shortly.

 

As this occurs, the airline sector will return to the fantastic profitability that investors are accustomed to, creating enormous possibilities for those who invested while prices were still low.

 

Even if airlines are anticipated to make a significant comeback shortly, conducting research before investing in their stock is crucial. Typically, investing in well-informed decisions provide the highest returns.