The airline industry is expected to grow due to growing travel demand. The industry also benefits from introducing innovative technologies and enhanced safety measures to ensure a seamless and secure travel experience.

Popular passenger airline company Southwest Airlines Co. (LUV) has been an investor favorite for a long time. However, given LUV’s mixed financials and the potential impact of strict regulations on its business, I think Ryanair Holdings plc (RYAAY), Gol Linhas Aéreas Inteligentes S.A. (GOL), and Air Canada (ACDVF) are better positioned to capitalize on the industry’s prospects.

LUV’s shares have lost 34% over the past three months to close the last trading session at $25.45. The company’s weak profitability justifies its underperformance. Its trailing-12-month net income margin of 2.31% is 62.8% lower than the industry average of 6.21%. Its trailing-12-month ROCE of 5.32% is 60.8% lower than the industry average of 13.59%.

Moreover, LUV reported disappointing second-quarter results. The company’s operating income came in at $795 million, down 31.3% year-over-year. Also, its net income and EPS declined 10.1% year-over-year to $683 million and $1.08, respectively.

In addition, the company’s EPS for the ongoing quarter (ending September 2023) is expected to decline 21.6% year-over-year.

LUV has an overall rating of C, equating to a Neutral in our proprietary POWR Ratings system.

Let’s look at what makes the industry’s prospects bright before delving into the fundamentals of stocks better positioned to capitalize and reward investors.

The International Air Transport Association (IATA) reported that total traffic increased by 28.4% in August 2023 compared to August 2022. Global traffic is now 95.7% of what it was before COVID-19.

IATA’s Director General Willie Walsh said, “Demand for air travel performed well in August. For the year to date, international traffic has increased by 50% versus last year and ticket sales data show international bookings strengthening for travel in the last part of the year.”

Furthermore, the global airline industry is expected to grow at a CAGR of 25.5% until 2027. The use of smart airports and the integration of AI into aviation operations contribute to the airline industry’s growth.

With these favorable trends in mind, let’s delve into the fundamentals of the three Airlines stock picks, beginning with number 3.

Stock #3: Ryanair Holdings plc (RYAAY)

Headquartered in Swords, Ireland, RYAAY offers scheduled passenger services in Ireland, the United Kingdom, Italy, and internationally. Also, it provides various ancillary services like non-flight scheduled and internet-related services; and markets car hire, travel insurance, and accommodation services.

RYAAY’s trailing-12-month EV/EBITDA multiple of 5.51 is 49.9% lower than the industry average of 10.99. Its trailing-12-month EV/EBIT multiple of 8.37 is 44.8% lower than the industry average of 15.18.

RYAAY’s trailing-12-month ROCE of 28.95% is 113.1% higher than the 13.59% industry average, while its trailing-12-month levered FCF margin of 16.03% is 185.6% higher than the industry average of 5.62%.

RYAAY’s revenues for the fiscal 2024 first quarter that ended June 30, 2023, rose 40% year-over-year to €3.65 billion ($3.96 billion). Its profit after tax was €663 million ($721.01 million), an increase of 290% from the prior year’s corresponding period. The company’s profit for the period was €662.90 million ($720.90 million), up 253.6% year-over-year.

Furthermore, the company’s earnings per common share increased 252% year-over-year to €58.22.

The consensus revenue estimate of $13.83 billion for the year ending March 2024 represents an 18.7% increase year-over-year. Its EPS is expected to grow 30.2% year-over-year to $8.82 for the same period. It surpassed EPS estimates in three of the four trailing quarters. RYAAY’s shares have gained 66.2% over the past year to close the last trading session at $94.54.

RYAAY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RYAAY has a B grade for Growth, Sentiment and Quality. Within the Airlines industry, it is ranked #8 out of 28 stocks. Click here for the additional POWR Ratings for Value, Stability, and Momentum for RYAAY.

Stock #2: Gol Linhas Aéreas Inteligentes S.A. (GOL)

Headquartered in São Paulo, Brazil, GOL provides scheduled and non-scheduled air transportation services for passengers and cargo and maintenance services for aircraft and components in Brazil and internationally.

GOL’s forward Price/Sales multiple of 0.15 is 88.4% lower than the industry average of 1.32. Its forward Price/Cash Flow multiple of 1.46 is 88.6% lower than the industry average of 12.85.

GOL’s trailing-12-month CAPEX/Sales of 3.51% is 20.1% higher than the industry average of 2.93%. Its trailing-12-month ROTC of 58.24% is 749.6% higher than the industry average of 6.86%.

GOL’s net operating revenues increased 27.9% year-over-year for the first quarter of 2023 to R$4.15 billion ($821.38 million). The company’s passenger transportation increased 24.2% year-over-year to R$3.72 billion ($737.06 million).

Also, its net income came in at R$556.29 million ($105.91 million), compared to a net loss of R$2.85 billion ($588.11 million) in the prior-year quarter. Its EPS came in at R$1.33, compared to a loss per share of R$7.04 in the year-ago period.

Street expects GOL’s revenue to increase 29% year-over-year to $3.82 billion for the year ending December 2023. Its EPS is expected to come in at $0.09 for the same period. The stock has gained 1.1% year-to-date to close the last trading session at $2.70.

GOL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #7 in the same industry. It has an A grade for Quality and a B for Growth and Value. To see additional GOL ratings for Stability, Sentiment and Momentum, click here.

Stock #1: Air Canada (ACDVF)

Headquartered in Saint-Laurent, Canada, ACDVF offers domestic, U.S. transborder, and international airline services under the brand names Air Canada Vacations and Air Canada Rouge. It directly provides scheduled service and air freight lift to more than 180 airports across six continents.

ACDVF’s forward non-GAAP P/E multiple of 4.92 is 71.7% lower than the industry average of 17.39. Its forward EV/EBIT multiple of 5.98 is 60.6% lower than the industry average of 15.81.

ACDVF’s trailing-12-month levered FCF margin of 10.12% is 80.2% higher than the industry average of 5.62%. Its trailing-12-month CAPEX / Sales of 8.05% is 175.1% higher than the industry average of 2.93%.

During the fiscal second quarter that ended on June 30, 2023, ACDVF’s operating revenues increased 36.3% year-over-year to CAD5.43 billion ($4 billion). Its adjusted EBITDA increased 692.2% year-over-year to CAD1.22 billion ($900.14 million), while its net income came in at CAD838 million ($618.30 million), compared to a net loss of CAD386 million ($284.80 million) for the year-ago quarter.

Analysts expect ACDVF’s revenue to increase 29.1% year-over-year to $15.86 billion for the year ending December 2023. Its EPS is expected to be $2.72 for the same period. Over the past year, the stock has gained 8.1% to close the last trading session at $13.39.

It’s no surprise that ACDVF has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Growth and a B for Quality. It is ranked #2 in the Airlines industry.

Beyond what is stated above, we’ve also rated ACDVF for Value, Stability, Sentiment, and Momentum. Get all ACDVF ratings here.

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RYAAY shares fell $1.01 (-1.07%) in premarket trading Friday. Year-to-date, RYAAY has gained 25.11%, versus a 14.88% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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