(Bloomberg) -- A record year for travel in the US is pushing airline stocks to a soaring annual outperformance, and the prospect of sustained earnings power points to a bullish outlook for 2025.
The S&P Supercomposite Airlines Index has jumped 60% in 2024, compared with a 27% gain for the S&P 500 Index. It’s the best year for the industry gauge since 2014, which is also the last time it beat the broader market by this amount. United Airlines Holdings Inc., the airline gauge’s top performer, is up 144% this year, making it the fourth-biggest gainer in the S&P 500.
Americans have been flying in unprecedented numbers, with the top 10 travel days in the Transportation Security Administration’s history coming in 2024, according to the US Department of Transportation.
The travel itch is one reason the stocks have rebounded from a mid-year slump. The other side of the equation is that there’s been limited growth in capacity, partly because carriers are cutting back on unprofitable routes. Barclays Plc sees seat growth below 3% for US airlines in 2025, short of long-term pre-pandemic trends.
Investors also see the shares as trading cheaply, say Barclays analysts led by Brandon Oglenski. He favors legacy carriers like United and Delta Air Lines Inc. because of their premium travel offerings and international exposure, as well as Alaska Air Group Inc. and Frontier Group Holdings Inc. for their revamped frequent flyer programs.
It’s a backdrop that bodes well for the year ahead, according to Barclays.
“We see airline fundamentals considerably improving into 2025, supporting a strong margin and earnings outlook for many carriers in the sector,” Oglenski wrote in a research note.
Boosting Forecasts
The rosier outlook has already started showing up in financial updates. JetBlue Airways Corp., Southwest Airlines Co. and American Airlines Group Inc. have all raised their earnings forecasts for the fourth quarter, reflecting strong demand for holiday travel, higher airfares and lower fuel prices. Delta kicks off the quarterly reporting cycle for the group on Jan. 10.
There’s also optimism that the regulatory backdrop under President-elect Donald Trump will support the group. Industry executives view Trump’s pledges of deregulation and lower taxes as likely to boost demand further and be more friendly toward mergers than President Joe Biden’s administration, which pressed carriers on issues like automatic refunds, and blocked a tie-up between JetBlue and Spirit Airlines Inc.
Grace Lee at Columbia Dividend Opportunity Fund says it’s unlikely that a drastic shakeup in air travel is high on Trump’s priority list. The fund held a position in Southwest as of November, an airline Lee says has improved following Elliott Investment Management’s activist campaign.
“In general I am more confident, and a lot of the management teams we’ve talked to seem to have more optimism about business and economic activity improving,” said the portfolio manager.
Airlines struggled to match capacity with demand coming out of the pandemic, scrambling to expand routes to keep up with the so-called revenge travel boost, and then dialing back growth plans after the surge faded. That imbalance was most pronounced among domestic-focused discount airlines, which are now pivoting into more upscale flight experiences to attract travelers with bigger budgets.
Deutsche Bank predicts the gap between the industry’s haves and have-nots will be wide, estimating that Delta, American and United will command roughly 90% of 2025’s operating and pretax profits. What’s clear is that the sector has undergone a dramatic turnaround in the waning months of 2024, and there’s still some ground to make up.
Costs stemming from keeping older planes in circulation due to aircraft delivery delays at Boeing Co. and volatility in the price of oil remain key risks, keeping many investors on the sidelines. Even with US airlines’ latest rally, the industry index is still down more than 10% from early 2020 levels.
Meanwhile, the $1.1 billion US Global Jets ETF (ticker JETS) — the largest exchange-traded fund tied to international travel — has seen short interest soar, signaling that some money managers aren’t convinced its 36% rally this year is sustainable.
Morgan Stanley analyst Ravi Shanker notes that institutional ownership of airline stocks remains low among long-only investors, though he says hedge-fund and retail positioning has picked up.
The bar to beat investor expectations “is no doubt higher than it used to be 12-18 months ago,” he says, but “it is still low overall.”
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