Data suggests that a person is more likely to be hit by lightning than catch Covid-19 in an aircraft. For people looking to travel during the holiday season, this data is indeed encouraging. Further, this is not the only good news for airline stocks.
Anthony Fauci recently reached out with a message for those suffering from Covid-19 fatigue. Fauci believes that “vaccines being developed are going to have a major positive impact once they start being deployed in December and early into next year.”
The International Air Transport Association also has a relatively positive outlook for the coming year. Spending on air transport is expected to increase to $476 billion in fiscal year 2021 from $340 billion in the current year.
These numbers do not suggest “V-shape” recovery for the airline industry. That’s too optimistic to expect. However, there is no doubt that the worst is over for airline stocks. As the vaccine reaches the masses in the coming year, the travel and tourism industry will see growth.
It therefore makes sense to hold airline stocks in the portfolio. These four airline stocks are attractive from a medium-term investment horizon.
- JetBlue Airways (NASDAQ:JBLU)
- Southwest Airlines (NYSE:LUV)
- Alaska Air Group (NYSE:ALK)
- Delta Air Lines (NYSE:DAL)
Airline Stocks: JetBlue Airways (JBLU)
From a fundamental perspective, JetBlue would be my top-pick among airline stocks. In the last month, JBLU stock has moved higher by 30% and I believe that the positive momentum is likely to sustain.
To elaborate on the fundamentals, the company reported adjusted-debt-to-capital at 58% for the third quarter of 2020. Further, the company had a robust liquidity buffer of $3.1 billion. This will help the company navigate few more challenging quarters.
JetBlue recently disclosed that it expects fourth-quarter revenue to decline by 70% on a year-on-year basis. This factor is largely discounted in JBLU stock. The focus will be on the vaccine reaching the masses in 2021 and its positive impact on the airline industry.
From a growth perspective, the JetBlue has also added 60 new routes to support growth and cash flow upside. This is likely to show results in the second half of the coming year.
Overall, JetBlue is likely to emerge from the crisis with one of the best balance sheets in the industry. This is a key factor that will drive stock upside. Furthermore, permanent reduction in fixed cost and structural margin improvement efforts will reflect in the stock price in the coming quarters.
Southwest Airlines (LUV)
LUV stock has already been in an uptrend in the last six months. During this period, the stock has moved higher by 44%. The worst is likely over for the airline industry and I expect the positive momentum for LUV stock to sustain.
Last month, Jefferies initiated LUV stock with a “buy” rating and a price target of $55. This would imply an upside of 16% from current levels. The first reason for this positive view by Jefferies is the fact that Southwest Airlines is a focused domestic carrier. As U.S. air traffic returns by 2022, the company is best positioned to benefit.
Another reason to like Southwest Airlines is a strong balance sheet position. This is an important consideration in uncertain times. As of the third quarter, the company reported cash and equivalents of $14.6 billion. In addition, the airline has $10 billion in unencumbered aircraft assets. As a matter of fact, Southwest Airlines is the only investment grade U.S. airline.
Of course, it’s unlikely to expect a strong recovery in the next two quarters. However, once capacity increases towards the second half of the coming year, LUV stock is likely to surge. Current levels are therefore attractive for an investment horizon of 12 months.
Alaska Air Group (ALK)
ALK stock has also been among the performers in the last six months. During this period, the stock has moved higher by 49%.
Similar to JetBlue and Southwest, the balance sheet is one of the key factors to consider Alaska Air. As of the third quarter, the company reported debt-capital of 59%. In addition, the company had a robust cash buffer of $5.5 billion ($3.7 billion in cash). For the third quarter, the company also reduced the cash burn to $4 million per day.
Therefore, the current liquidity is sufficient to navigate the pandemic headwind. In the worst-case scenario, Alaska Air has unencumbered aircraft that provide headroom for leveraging.
From the perspective of passenger traffic growth, Alaska Air has been taking measures to boost confidence. As an example, the aircraft have “hospital grade HEPA filters” that “remove 99.9% of airborne particulates and fresh air is re-circulated through the cabin every three minutes.”
Alaska Air also plans to bring back middle seat occupancy early next year. This will primarily be for shorter-haul flights. Middle seat occupancy will help in boosting capacity and margins.
Overall, Alaska Air has strong fundamentals and has been modernizing its fleet even during the pandemic. Once the headwinds are navigated, the airline is well positioned for healthy cash flow generation. I am therefore bullish on ALK stock.
Delta Air Lines (DAL)
I would also include DAL stock among the top airline stocks to buy. There are several reasons DAL stock for the coming year.
The company expects to end the December quarter with a strong liquidity position of $16 billion. Further, Delta Air Lines is targeting cash break-even during spring 2021. If this target is achieved, the stock can be significantly higher from current levels in the next few quarters.
The airline reported an average daily cash burn of $100 million towards the end of March 2020. For the month of December, the airline expects cash burn of $10 million per day. Therefore, the Delta has been successful in significant cost cutting. Once passenger capacity growths, cash flows can be robust.
Delta has also done well on the passenger safety front. This is likely to translate into growth in passenger traffic in the coming months. As an example, the airline recently launched “quarantine-free, Covid-free travel to Europe.”
DAL stock is therefore attractive as the airline enters 2021 with a strong liquidity buffer along with initiatives to boost passenger confidence.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.