The airline industry was among the worst-hit industries during the COVID-19 pandemic, with lockdowns and travel restrictions imposed last year. However, the International Air Transport Association (IATA) expects the worst part of COVID-19’s effects on the airlines to be over and that total industry losses to fall considerably in 2022. Furthermore,  IATA expects passenger numbers to increase to 3.4 billion in the coming year, almost hitting 2014 levels.

However, the key barrier to the industry’s recovery is rallying oil prices, because fuel prices negatively correlate with the profitability of airline operators. Oil prices hit multi-year highs on October 25, with U.S West Texas Intermediate (WTI) crude futures reaching their highest level since October 2014, while Brent hit its three-year high. Fuel costs constitute 19% of total expenditure for airlines worldwide in 2021.

Though oil prices remain elevated, we think Southwest Airlines Co. (LUV), Delta Air Lines, Inc. (DAL), United Airlines Holdings, Inc. (UAL), and American Airlines Group Inc. (AAL) could deliver solid returns considering their fundamental strength and the expected increase in travel ahead of the holiday season.

Southwest Airlines Co. (LUV)

LUV is a Dallas, Tex.-based passenger airline company that provides scheduled air transportation services in the United States and nearby locations. The company offers inflight entertainment and connectivity services to its passengers.

On October 25, LUV launched its Rapid Rewards® Business program, whereby members and businesses can earn points to get discounts on flight bookings. The new program of incentive-based reward collection might enhance the passenger experience greatly.

On October 21, in a partnership with Norway-based climate and technology company CHOOOSE™, LUV launched its carbon offset offer, inviting customers to contribute toward curbing carbon emission. This development reflects LUV’s 10-year plan to maintain carbon neutrality at 2019 levels. LUV also plans to modernize its fleet with sustainable fuel-efficient aircraft.

For its  third fiscal quarter, ended September 30, LUV’s total operating revenues increased 161% year-over-year to $4.68 billion. This can be attributed to a 190.7% rise in operating revenues from its passenger segment from the prior-year quarter to $4.23 billion. Net income and net income per share came in at $446 million and $0.73, respectively, registering a substantial increase from their negative year-ago values.

A $2.79 consensus EPS estimate for the next year (fiscal 2022) indicates a 221.3% year-over-year increase. Likewise, a $21.85 billion consensus revenue estimate for the coming year reflects a 41.6% improvement from the current year. Furthermore, LUV has an impressive surprise earnings history; it has topped consensus EPS estimates in three out of the trailing four quarters.

The stock has gained 11% over the past year and 1.9% year-to-date to close yesterday’s trading session at $47.48.

LUV’s strong fundamentals are reflected in its POWR Ratings. The stock has a Growth and Quality grade of B. In the 30-stock Airlines industry, it is ranked #6. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. Click here to see the additional POWR Ratings for LUV (Value, Momentum, Stability, and Sentiment).

Delta Air Lines, Inc. (DAL)

DAL in Atlanta, Ga., is an international provider of scheduled air transportation for passengers and cargo. The company sells its tickets through numerous distribution channels, including delta.com and online travel agencies.

On September 7, Chevron Corporation (CVX), Alphabet Inc. (GOOGL), and DAL agreed to a memorandum of understanding (MoU) to use cloud technology in tracking sustainable aviation fuel (SAF) emission data. Regarding this collaboration and its impact, Amelia DeLuca, Delta’s managing director of Sustainability, said, "On top of being the first carbon-neutral airline on a global basis, we’ve pledged to replace 10 percent of our jet fuel with SAF by 2030. This partnership has the potential to help us achieve that goal while providing important data and analytics that demonstrate the environmental integrity of our commitment."

DAL’s total operating revenue increased 199% year-over-year to $9.15 billion in its third fiscal quarter, ended September 30. Its net income stood at $1.21 billion, while its EPS came in at $1.89, both up substantially from their negative year-ago values.

The Street’s $3.50 EPS estimate for the coming year (fiscal 2022) reflects a 176.9% year-over-year rise. Likewise, the Street’s $41.46 billion revenue estimate for the next year indicates a 42.4% improvement from the current year.

DAL’s stock has gained 16.2% in price over the past year to close yesterday’s trading session at $39.51.

DAL has a Quality grade of B in our proprietary rating system. It is ranked #13 in the Airlines industry. To see the additional POWR Ratings for Growth, Value, Momentum, Stability, and Sentiment, click here.

United Airlines Holdings, Inc. (UAL)

UAL is Chicago-based global air transportation services provider that transports people and cargo through its mainline and regional fleets. In addition, the company sells fuel, provides catering services and ground handling for third parties.

On October 26, UAL announced that it would launch a new nearly hourly shuttle service between New York/Newark Liberty International Airport and Reagan National Airport on October 31. The company also announced the addition of five new flights between LaGuardia Airport and Washington Dulles Airport. Earlier, UAL unveiled its plans to expand its transatlantic operations, including adding 10 new flights and five new destinations. New routes are expected to begin in the Spring of 2022. These additions in its flight routes should increase UAL’s overall operational capability.

On October 6, UAL and PayPal Holdings, Inc. (PYPL) announced a new way for customers to make in-flight payments using a PayPal QR code. The contactless payment method is expected to start before the year ends and, in turn, should enable UAL to provide a superior flying experience to its customers.

For its third fiscal quarter, ended September 30, UAL’s total operating revenue increased 211.4% year-over-year to $7.75 billion. This can be attributed to a 302.5% increase in passenger revenue from the prior-year quarter to $6.64 billion. Its net income and EPS are both up substantially from their negative year-ago values to $473 million and $1.44, respectively.

Analysts expect its EPS to increase 117.2% year-over-year to $2.37 in the next year (fiscal 2022). Likewise, the Street expects its revenue to rise 68.7% from the current year to $41.53 billion in the coming year.

The stock has gained 22.7% in price over the past year to close yesterday’s trading session at $46.65. It has gained 7.9% year-to-date.

UAL has a Growth grade of B. It is ranked #21 in the Airlines industry. Click here to see the additional POWR Ratings for Value, Momentum, Stability, Sentiment, and Quality for UAL.

American Airlines Group Inc. (AAL)

AAL operates as a network air carrier, providing scheduled air transportation services to passengers and cargo through its domestic hubs and international partner gateways. AAL is headquartered in Fort Worth, Tex.

On September 20, AAL became an anchor partner of Breakthrough Energy Catalyst, a Bill Gates foundation dedicated to averting the climate crisis, investing $100 million in the collaborative effort. The collaboration is aimed at concrete action to develop emission reduction solutions, which should help AAL reach its low-carbon future targets.

Earlier, in September, AAL and Brazilian airline GOL Linhas Aéreas Inteligentes S.A. (GOL), signed an exclusive codeshare agreement for greater commercial cooperation, with AAL investing $200 million in GOL equities. Regarding the agreement, AAL President Robert Isom said, “Our long-haul network marries seamlessly with GOL's strong domestic network in Brazil, and together, we will be able to offer customers flying to, though, and from Brazil access to the largest network with the lowest fares and the Americas' biggest and best joint travel loyalty program."

AAL’s total operating revenues went up 182.7% year-over-year to $8.97 billion in its third fiscal quarter, ended September 30. Its net income and EPS came in at $169 million and $0.25, respectively, improving substantially from their negative year-ago values. For the nine months ended September 30, its cash and restricted cash at the end of the period rose 45.1% from the same period last year to $431 million.

A $0.06 consensus EPS estimate for the next year (fiscal 2022) indicates a 100.7% year-over-year increase. Likewise, the $42.80 billion consensus revenue estimate for the coming year reflects a 44.5% improvement from the current year. In addition, AAL has beaten consensus EPS estimates in three out of the trailing four quarters.

AAL’s stock has gained 52.6% over the past year and 21.9% year-to-date to close yesterday’s trading session at $19.23.

AAL has a B grade for Growth and Quality. It is ranked #11 in the Airlines industry. In addition to the POWR Rating grades we’ve stated, one can see AAL ratings for Value, Momentum, Stability, and Sentiment here.

LUV shares were trading at $47.76 per share on Tuesday afternoon, up $0.28 (+0.59%). Year-to-date, LUV has gained 2.47%, versus a 23.38% rise in the benchmark S&P 500 index during the same period.

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.

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