One Airline Stock to Consider and One to Stay Away From

Airline stocks are dirt cheap and worth considering ahead of an eventual recovery, but not all are well suited in the long run.

The airline industry has seen a remarkable recovery in 2022 thanks to increasing travel demand and consumers’ willingness to pay higher fares. Nevertheless, some airlines are still drowning in debt from the pandemic. At the same time, several have had to cut routes and scale back on expansion plans as supply chain and labor constraints have delayed the production of new aircraft, while airlines continue to struggle with labor shortages. 

Airfare in the U.S. has eased from its peak earlier this year, but prices are still well above 2021 levels. According to data from the  Bureau of Transportation Statistics, airfares were up 36% year-over-year in November. Rising inflation and higher interest rates could put a damper on demand in the short term, but many airlines are expected to return to profitability in 2023.  

With airline stocks currently trading at very low multiples, many long-term-minded investors are eyeing the group, wondering which of these beaten-down tickers is the best value. Some airlines will be better equipped to withstand a slowing economy and possible recession, while others may struggle to keep up. Here we will examine two companies from the airline industry, one that seems prepared to build on recent success and one that could be left hanging by a thread in a weakening economy.  

Delta Airlines (DAL), the second airline company to have joined the coveted S&P 500 Index, commands more than a 17% share of the domestic aviation market. As you would expect, most of the Atlanta, GA-based carrier’s revenues are realized from its airline segment. What might surprise you is that 10% of the $29.9-billion amount generated in 2021 came from the company’s refinery segment, which operates for the benefit of the airline division by providing it with jet fuel from its own production.

Fuel savings are crucial to a functioning aviation industry in this next chapter. From increasing costs to environmental impact, airlines have had plenty of reasons to save every bit of jet fuel they can. Delta recently revealed details of how its fleet renewal program has helped to save tens of millions of gallons of fuel.  

Earlier this month, the airline heavyweight raised its Q4 and full-year 2022 guidance and forecast an upbeat 2023, driven by robust demand. The company now expects the fourth-quarter 2022 operating margin to be 11%. Management sees adjusted earnings per share in the $1.35-$1.40 range (the earlier outlook was in the range of $1-$1.25). For the full-year 2023, DAL expects 15-20% year-over-year revenue growth. Earnings per share and operating margin for 2023 are expected in the $5-$6 band and 10-12% range, respectively. 

Delta has been more conservative than some competitors in bringing back capacity, but the carrier aims to have its network restored to 2019 levels next summer. In the meantime, several competitors have had to cut routes and scale back on expansion plans as supply chain and labor constraints have delayed the production of new aircraft, while airlines continue to struggle with labor shortages, but for Delta, bookings remain strong into early 2023.

Delta shares are currently very cheaply priced at less than eight times earnings. The stock garners an 85% Buy rating on Wall Street. A median consensus price target of $45 represents a 36% increase from the last price.    

A less optimistic story from the airline industry is that of Jet Blue Airways (JBLU). Jet Blue has not had an easy year amid rising fuel costs, supply chain snags, and inflationary pressure. Recent losses have been compounded by Hurricane Nicole, a rare November storm that made landfall on the Atlantic Coast of Florida, causing closures and evacuations throughout the state and leaving a wake of destruction in its path. As a result, JetBlue was forced to cancel and suspend flights and issue travel waivers for destinations in the storm’s path. Nicole negatively affected operations for several airlines, but JetBlue seems to be struggling the most to bounce back. 

With hurricane Nicole’s negative impact on operations, demand for the final month of the year has not been as strong as expected, according to the company’s management. Aside from the hurricane, this year’s holiday calendar timing has had a negative impact, with Christmas and New Year’s falling on weekends this December. As a result, the company revised its year-end and Q4 outlook. Management now anticipates revenue per available seat mile for the fourth quarter of 2022 to be at the low end of its prior guided range of a 15-19% increase from the fourth quarter of 2019.  

With airline stocks currently trading at extremely low multiples, value seekers may be eyeing the group, wondering which ticker is the better buy. Some airlines will be more suited to withstand a slowing economy and possible recession, while JetBlue does not seem well-equipped for further negative impact. Anyone considering JBLU at less than eight times earnings would do better to consider a more stable name, like Delta.