Airline stocks, already up 15% this year ahead of the S&P 500, are poised to rise even higher for five reasons even as the price of oil, their highest input cost, rises. Airlines are benefiting from a handful of factors including strong business and leisure travel. Surveys of consumers planning vacation travel in the next six months are at all-time highs. Meanwhile, load factors, or capacity utilization, remain near record levels, and airlines are successfully adding revenue with ancillary fees for seat assignments, priority check-in, checked baggage, and other services. Carriers are adding seat capacity to keep a healthy demand and supply balance. Lastly, oil prices, a key part of airline costs, are stabilizing after falling 22% last year and rising roughly 20% in 2019, per Barron’s.

5 Reasons Airline Stocks Will Fly Higher

  • Strong business and leisure travel
  • Capacity utilization near record levels
  • New revenue streams via ancillary fees and services
  • Additional seat capacity
  • Oil price stability

Source: Barron's 

Crude Stabilizes After Rocky Year

“Stabilizing fuel costs coupled with an improving supply/demand setting could be just what airline stocks need to take flight,” says Kristen Perleberg, a senior analyst and portfolio manager with Leuthold Group.

Airline stocks are generally correlated with jet fuel prices. In November, when crude prices fell 22% in November, the sector outperformed the broader market by more than 10%. However, Perleberg notes that often the group’s strongest performance has come from times when real prices of crude were above historical averages.

Healthy Demand, New Revenues

Supply and demand fundamentals also look solid, per the Leuthold analyst. She remains upbeat on airline’s ability to combat pricing wars with new sources of income from add-ons that used to be imbedded in ticket prices. 

Barron’s notes that investors can gain exposure to the group through the U.S. Global Jets ETF (JETS), which holds a basket of 33 stocks, primarily consisting of U.S. and foreign airlines, aviation services and equipment stocks. The JETS ETF is up 11.5% YTD compared to the S&P 500’s 9.4% return. 

As for individual stock picks, Evercore ISI recommends Southwest Airlines (LUV). Analyst Duane Pfennigwerth highlights the company’s superior cost management, stable passenger demand and bookings, and improved operating margins. He expects the company to “get its swagger back,” forecasting the stock to gain nearly 10% over 12 months to reach a price target of $64.

Pfennigwerth also likes Spirit Airlines (SAVE), which is gaining traction with its flights to foreign markets in the Caribbean and Latin America as it offers premium seating and new digital options. His $80 price target for Spirit implies a near 30% upside from current levels.

 Looking Ahead

It’s important to note that any sharp increase in fuel prices would still pressure airline stocks. A major economic down cycle would also weigh on the sector by reducing the demand for air travel.