The pent-up travel demand has been buoying the airline industry’s recovery from the damage caused by the pandemic restrictions. Jamie Baker, the senior airline analyst at JPMorgan, predicts business travel demand to ramp up this fall, which could boost revenues for airline companies. Furthermore, the domestic aviation market is projected to grow at a CAGR of 3.2% to $1.13 trillion by 2027.
However, the airline sector is currently struggling with macroeconomic and geopolitical headwinds. High inflation, surging fuel costs, and staffing issues are troubling the industry.
Airlines have been raising ticket prices, which might help offset rising fuel costs. However, this could affect demand as consumers grapple with high inflation rates.
Given this backdrop, fundamentally strong airline stock Alaska Air Group, Inc. (ALK) could be a quality addition to one’s portfolio. However, not every airline stock is expected to stay afloat amid the uncertainties surrounding the market and the economy. Spirit Airlines, Inc. (SAVE) is best avoided now due to its weak financials and bleak growth prospects.
Stock to Buy:
Alaska Air Group, Inc. (ALK)
ALK provides passenger and cargo air transportation services. Operates through three segments: Mainline, Regional, and Horizon. The company flies to more than 120 destinations across the United States and North America.
On July 19, 2022, the company announced its plans to become the first U.S. airline to launch an electronic bag tag program later this year. With this device, ALK aims to provide a hassle-free check-in experience and enhance travelers’ convenience.
ALK’s passenger revenue for the second quarter ended June 30, 2022, increased 78.8% year-over-year to $2.42 billion. Its total operating revenues grew 74.1% year-over-year to $2.66 billion. The company’s non-GAAP adjusted net income came in at $280 million, compared to a loss of $38 million in the year-ago period. Also, its non-GAAP adjusted net income per share came in at $2.19, compared to a loss per share of $0.30 in the previous period.
The consensus EPS estimate of $2.40 for the fiscal third quarter (ending September 30, 2022) represents an increase of 63.3% year-over-year. The consensus revenue estimate of $2.81 billion for the current quarter indicates a 43.9% increase from the same period last year. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past month, the stock has lost marginally to close the last trading session at $43.69.
ALK’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
It has a B grade for Growth, Sentiment, and Quality. Among the 31 stocks in the Airlines industry, it is ranked #3. Click here to see the POWR ratings of ALK for Value, Momentum, and Stability.
Stock to Sell:
Spirit Airlines, Inc. (SAVE)
SAVE is a commercial airline service provider that flies to approximately 85+ destinations across 16 countries in the United States, Latin America, and the Caribbean. It primarily focuses on value-conscious travelers and offers them unbundled base fares with optional services.
On July 27, 2022, SAVE announced the termination of its merger agreement with Frontier Group Holdings, Inc. Earlier this year, in February, both companies agreed to combine to form America’s most ultra-low-fare airline.
SAVE’s total operating expenses increased 84.3% year-over-year to $1.41 billion for the second quarter that ended June 30, 2022. The company’s operating loss came in at $45.33 million compared to an operating income of $93.21 million in the year-ago period. Its adjusted net loss and adjusted net loss per share narrowed 29.6% and 30.2% year-over-year to $32.19 million and $0.30, respectively.
Analysts expect SAVE’s EPS to remain negative for fiscal 2022. Over the past year, the stock has declined 8.9% to close the last trading session at $22.31.
SAVE’s POWR Ratings are consistent with this bleak outlook. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Growth, Stability, and Sentiment. Within the same industry, it is ranked #28. To see the other ratings of SAVE for Value, Momentum, and Quality, click here.
ALK shares were trading at $43.41 per share on Friday afternoon, down $0.28 (-0.64%). Year-to-date, ALK has declined -16.68%, versus a -17.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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