Don’t let renewed COVID-19 worries and fuel prices scare you out of these aviation stocks.
Now might seem like a curious time to consider the best airline stocks to buy. After being beat down by the COVID-19 pandemic, gasoline prices are skyrocketing, with jet fuel prices up more than 126% in a year. The U.S. Global Jets ETF (ticker: JETS), an exchange-traded fund, or ETF, that tracks the airline industry, dropped 9.3% between April 18 and May 18. But people still need and want to fly, so while the pandemic and fuel prices present near-term headwinds, airline stocks can still thrive over the long term. Morningstar analyst Burkett Huey writes that the fact that airlines like Delta have posted relatively flat revenue despite a 120% sequential quarterly increase in COVID-19 cases this year “indicates consumer travel is considerably less sensitive to COVID-19 than it was in prior quarters.” If you’re willing to weather some near-term headwinds for potential long-term gain, these are eight of the best airline stocks to buy for 2022.
Southwest Airlines Co. (LUV)
Southwest is the blue-chip of airlines, combining both a robust balance sheet and a great low-cost business model. The company has two predominant strengths over its rivals. First, it has one of the best credit ratings of the major American carriers. To that end, it was carrying about $12.5 billion in cash and cash equivalents at the end of 2021. Southwest didn’t have to dilute its equity dramatically or issue tons of debt during the crisis either. It’s easy to think frailer rivals such as American Airlines Group Inc. (AAL) are “cheap” because their stock prices haven’t recovered from pandemic-induced losses yet. But when you look at the complete picture, Southwest is actually one of the strongest valuation plays in the airline sector as its overall enterprise value has actually rebounded less quickly than its more-indebted rivals. Southwest’s catering to tourists and leisure travelers should also help it return to strong profitability; business travel has been slower to rebound.
United Airlines Holdings Inc. (UAL)
United Airlines posted revenue of $7.6 billion for the first quarter of 2021. While this is still 21% lower than first-quarter revenue from 2019, before the pandemic, Huey says increased yield and capacity assumptions can offset the effect of higher oil prices to maintain a fair value estimate of $57 per share. United is the most internationally focused of the major U.S. airlines, which may make it difficult for the airline to rebound from the pandemic as swiftly as more domestic carriers. But Huey expects this to be a boon to the airline as international travel continues to expand into 2023. While the airline appears to be on the rise, Huey adds that, “We think United has considerably greater regulatory uncertainty than peer carriers due to its increased exposure to international travel, and we think summer 2022 will be a critical test of international travel recovery for United.”
Alaska Air Group Inc. (ALK)
Alaska Air is a midsize carrier with its primary hub in Seattle. Shares were going for around $70 each prior to the pandemic, around $55 in summer 2021, and are now fetching about $47. This isn’t due to ALK having a particularly bad run of it during the pandemic; airlines such as American had to take on more dilution and debt to survive. However, the market is now apparently penalizing Alaska for its destinations. Alaska serves California and Hawaii extensively in addition to its namesake state. Markets such as Hawaii have been slower to recover due to heavy local COVID-19 restrictions. However, the market may be sleeping on ALK at this point. The airline has historically had above-average management and well-run operations. Weakness in tourist markets such as Hawaii will pass, whereas ALK’s strong corporate culture should persist. The airline is also in the process of upgrading its fleet, which should lead to strong fuel savings going forward.
Delta Air Lines Inc. (DAL)
One reason Delta is among the best airline stocks to buy now is simple: The company entered the pandemic with the strongest balance sheet of the big three legacy carriers. United Airlines’ financials were in merely average shape, while American was in the most dire condition of the bunch. Coming out of the pandemic, Delta has a solid edge over United in terms of competitive positioning. United was arguably slow to add back flights at its key hubs. This gave ample room for discounters such as Southwest and JetBlue Airways Corp. (JBLU) to attack United at its main bases of operation. Delta, by contrast, has maintained a solid grip on New York, added to its share in Los Angeles and runs a veritable empire out of Atlanta. Delta has been successful at passing the rise in fuel prices and wage inflation onto consumers, according to Huey, and beat the latest FactSet sales estimate by 6.5%. Of the big three legacy carriers, Delta has a solid chance of regaining pre-pandemic levels of prosperity.
Controladora Vuela Cia de Aviacion (VLRS)
It has quickly become clear that the tourist-focused airlines are faring better than the legacy carriers. Additionally, Mexico has been one of the best-performing aviation markets in the Americas. Traffic has already returned to 2019 levels or surpassed them outright at various Mexican airports. Combine these facts, and it’s a great time to be a Mexican discount carrier. Controladora Vuela Cia de Aviacion, or Volaris, is Mexico’s largest and most successful of the bunch. It got a big boost from the recent industry downturn as rival Interjet suspended operations. Mexico’s legacy carrier, Aeromexico, fell into bankruptcy reorganization as well. Add it all up and Volaris is the Mexican low-cost leader serving a burgeoning market in one of the world’s quickest-to-reopen tourist destinations. Volaris’ shares have already moved sharply higher, but they could have further room to run.
Copa Holdings SA (CPA)
Copa is another Latin American carrier that is set to thrive in a rapidly shifting landscape. Latin American governments provided far less aid to their airlines than the U.S. did. Thus, during COVID-19, Aeromexico, Latam Airlines and Avianca all went into bankruptcy protection. All continue to fly, but being in bankruptcy certainly can hamper competitiveness. This opens a big opportunity for Panama’s Copa Airlines. Panama is centrally located and thus Copa can add capacity in Mexico, Colombia, Peru and other markets where ailing airlines may need to pull back. Copa also enjoys high-margin flights in its Central American market, where there is minimal discount carrier competition. Copa shares closed at $68.09 on May 18, down sharply from their $110 pre-pandemic levels. That could change in a hurry as Latin American economies start surging back to life.
Ryanair Holdings PLC (RYAAY)
Ryanair is Europe’s dominant low-cost carrier. Like Southwest in the U.S., Ryanair entered COVID-19 in good condition, and thus has made it through the pandemic without taking a crippling financial blow. Indeed, the airline is rapidly picking back up. Ryanair had been gaining market share for years thanks to its incredibly cheap prices. The pandemic should only further Ryanair’s competitive advantage as European legacy carriers struggle under the combined weight of large debt loads and exposure to the ailing business-traveler segment of the industry. Ryanair shares have more than doubled over the past decade, peaking at more than $120 per share in early 2018, making it one of the few long-term winners in the airline industry. This dip could be a good opportunity to get involved in Ryanair, which closed at $82.98 on May 18.
Viasat Inc. (VSAT)
Investing in the airline industry doesn’t have to be limited to airline stocks. You can also benefit from the industry’s growth through service providers like Viasat, which provides high-speed internet connectivity to aircraft via satellite. Micah Walter-Range, partner and president of Caelus Partners, and formerly the director of research and analysis at the Space Foundation, says Viasat connectivity is now on 300 Delta aircraft with another 200 planned by the end of the year. “It’s twice as fast as Delta’s Wi-Fi offered in 2019 and other airlines are making similar upgrades,” he says. “For the travelers who grew accustomed to constant connectivity while spending extra time at home during the pandemic, inflight Wi-Fi continues to improve to meet ever-rising expectations.”
8 best airline stocks to buy:
— Southwest Airlines Co. (LUV)
— United Airlines Holdings Inc. (UAL)
— Alaska Air Group Inc. (ALK)
— Delta Air Lines Inc. (DAL)
— Controladora Vuela Cia de Aviacion (VLRS)
— Copa Holdings SA (CPA)
— Ryanair Holdings PLC (RYAAY)
— Viasat Inc. (VSAT)
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Update 05/19/22: This story was published at an earlier date and has been updated with new information.