Airline Stocks Set to Rise this Fall

Labor Day holiday traffic projected to increase 4% vs. last year

Airline stocks have faced stiff headwinds over the past month as concerns over an airfare price war in 2020 gather momentum due to capacity growth from the re-entry of the embattled Boeing 737 MAX. Analysts, suppliers, and airlines expect the plane to be flying again sometime during the fourth quarter, although The Boeing Company (BA) has not disclosed a specific date.

"We believe 2020 capacity from the publicly traded U.S. airlines will increase 5.6% versus 3.0% in 2019," Cowen analyst Helane Becker wrote in a research note cited by Barron's.

Despite the prospect of a capacity-driven price war, the sector remains supported by upbeat consumer confidence, consistent wage growth, and household net worth near all-time highs. Airlines for America (A4A), the trade organization for leading U.S. airlines, projects a 4% increase in Labor Day holiday traffic compared to last year. From a technical standpoint, the major carriers sit near crucial support levels, indicating that the market has fully factored in growing supply.

Those who see airline stocks flying to greater heights in the fourth quarter should consider American Airlines Group Inc. (AAL) and Delta Air Lines, Inc. (DAL), along with the sector's proxy exchange-traded fund (ETF), the U.S. Global Jets ETF (JETS). Let's take a closer look at each and explore several trades that may be ready for takeoff.

American Airlines Group Inc. (AAL)

American Airlines operates as a network air carrier with almost 7,000 scheduled daily flights to more than 350 destinations in 50 countries. The Fort Worth, Texas-based company operates a mainline fleet of 956 aircraft, including 24 of the troubled 737 MAX jets that have resulted in the cancellation of multiple flights per day. The U.S. Department of Transportation recently approved American's joint venture with Australia's leading carrier Qantas Airways, helping the airline expand its reach in the Oceania region. American trades at about five times 2020 earnings, below the industry average multiple of 9 times. The stock has a market capitalization of $11.72 billion, issues a 1.58% dividend yield, and is trading down 18.60% over the past month as of Aug. 30, 2019.

American Airlines shares have oscillated within a broad descending channel since October of last year. Price broke below the pattern's lower trendline earlier this week but quickly reversed, indicating a possible head-fake move. Furthermore, the moving average convergence divergence (MACD) indicator line crossed above its signal line in Thursday's trading session to generate a buy signal. Those who enter here should set a stop-loss order beneath the August low at $24.24 and aim to book profits near the channel's upper trendline between $33 and $34.

Chart depicting the share price of American Airlines Group Inc. (AAL)

Delta Air Lines, Inc. (DAL)

With a market value of $37.63 billion, Delta Air Lines provides scheduled air transportation for passengers and cargo in the United States and globally. The carrier flies to more than 325 destinations in 60 countries, with key hubs located in Atlanta, New York, Salt Lake City, Detroit, Seattle, and Minneapolis-St. Paul. Mark Tepper, president and CEO of Strategic Wealth Partners, recently told CNBC's "Trading Nation" program that he favors Delta in the space because the airline has no exposure to the 737 MAX and because of its lucrative partnership with American Express Company (AXP). Analysts expect Delta to post third quarter (Q3) earning per share (EPS) of $2.26, representing a 25.56% increase from the year-ago quarter. Although the airline's stock has fallen 7.33% over the past month, it has outperformed the industry average by nearly 2% as of Aug. 30, 2019. Investors receive a 2.84% dividend yield.

The Delta share price has remained above its 200-day simple moving average (SMA) since early June, which indicates an overall long-term bullish trend. A month-long retracement to an uptrend line that dates back to January provides swing traders with a suitable entry point. The relative strength index (RSI) sits well below overbought territory, giving price ample room to test the year-to-date (YTD) high at $63.44. Traders should manage downside with a stop placed underneath Wednesday's low at $55.80.

Chart depicting the share price of Delta Air Lines, Inc. (DAL) 

U.S. Global Jets ETF (JETS)

Taking off in 2015, the U.S. Global Jets ETF aims to provide similar returns to the U.S. Global Jets Index. The fund invests its $56.43 million asset base in passenger airlines, aircraft manufacturers, airports, and terminal services companies. Key allocations in the ETF's portfolio of 35 holdings include Delta at 13.08%, Southwest Airlines Co. (LUV) at 12.68%, and United Airlines Holdings, Inc. (UAL) at 12.67%. A 0.20% average spread, coupled with daily dollar volume liquidity of $900,000, keeps trading costs competitive. As of Aug. 30, 2019, JETS charges an annual management fee of 0.60% and has stalled 10.82% over the past month.

JETS shares have roughly traded within a $2.50 range over the past seven months, making the ETF a suitable play for those who favor range-bound strategies. The most recent retracement to the pattern's lower trendline found support at $28 and rallied sharply from the area in Thursday's session. Traders who buy at this level should set a take-profit order near the range's top trendline at $31.50, where the fund's price may find overhead resistance. Think about placing a stop beneath the Aug. 28 low at $27.55 to protect trading capital.

Chart depicting the share price of the U.S. Global Jets ETF (JETS)
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