Driven by the strong recovery of air travel demand from pandemic lows, stocks in the Zacks Airline industry have performed well in 2024. Demand was not only strong for leisure travel but also for business-related air travel. Declining fuel costs aided airlines. This is because fuel expenses represent a key input cost for airlines.
Driven by the tailwinds, the Zacks Airline industry has gained in double digits this year despite challenges like high labor costs and lingering supply-chain issues. The positives are expected to continue next year. Given this backdrop, investors interested in the industry would do well to bet on stocks like Southwest Airlines LUV, SkyWest SKYW, United Airlines UAL and Controladora Vuela Compañía de Aviación, S.A.B. de C.V. VLRS, popularly known as Volaris, for handsome returns.
Let’s take a more detailed look into the factors that are impacting the industry’s fortunes.
Challenges Faced by Airline Stocks
The increase in expenses on the labor front represents a major challenge for airlines. With U.S. airlines grappling with labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased.
As a result, we have seen pay-hike deals being inked in the space. This resulted in a spike in labor costs. For example, Southwest Airlines expects consolidated cost per available seat mile, excluding fuel, third-party business expenses, profit-sharing and special charges, to increase in the 11-13% band year over year in the fourth quarter of 2024.
High costs naturally put pressure on margins. The uptick in non-fuel expenses in 2024 was primarily due to intense salary pressure and expenses related to several airline employee strikes. Additionally, the sharp increase in maintenance costs due to aircraft groundings and an aging global fleet resulted in a rise in non-fuel expenses.
Factors Favoring Airline Stocks
Despite the abovementioned challenges, the industry demonstrates resilience, especially owing to upbeat passenger volumes. Strong air travel demandis aiding airlines’ top-line performance. Driven by healthy booking trends, many airlines issued improved outlooks for the December quarter. For example, LUV now anticipates its fourth-quarter revenue per available seat mile (RASM: a key measure of unit revenue) to increase in the range of 5.5%-7% on a year-over-year basis. This marks an improvement from the previous forecast of 3.5% to 5.5%. The upside was owing to better-than-expected leisure travel demand. The solid growth in unit revenues is backed by consistent travel demand and benefits from the successful execution of tactical actions (which includes improving network optimization and capacity rationalization).
The southward movement of oil price also bodes well for the bottom-line growth of industry participants. Notably, oil prices declined 14% in the July-September period, mainly due to weakening global demand. China, the world’s largest oil importer, struggled due to a slowdown in manufacturing, with its economy shrinking for the fifth consecutive month in September.
Airlines Likely to Fly High in 2025
Passenger volumes are expected to stay strong in the coming year. Owing to the buoyant air travel demand scenario, the International Air Transport Association or IATA expects the industry to generate a net profit of $36.6 billion (net profit margin of 3.6%) in 2025 compared with $31.5 billion estimated for 2024. The top line in 2025 is now anticipated to be $1.007 trillion (crossing the $1 trillion mark for the first time). The revenue projection reflects a 4.4% increase from the 2024 expectation.
Passenger revenues are the biggest driver of the rosy projection for 2025. Per IATA, passenger revenues in 2025 are anticipated to be $705 billion, which is 70% of total revenues. Ancillary revenues are expected to be $145 billion. Owing to the uptick in passenger volumes, IATA forecasts passenger count to exceed 5 billion across the globe in 2025 for the first time.
Apart from rosy passenger revenues, fuel costs are expected to be low in 2025, further supporting growth of airlines. Per IATA, the average jet fuel cost is expected to be $87 per barrel in 2025, down from $99 per barrel estimated in 2024. The total fuel bill in 2025 is expected to be $248 billion, down 4.8% from the 2024 estimate.
Top Airline Stocks to Buy
Given this encouraging backdrop, we believe airline stocks should be in one’s portfolio. Below, we present four airline stocks having a Zacks Rank #1 (Strong Buy) or #2 (Buy). Moreover, the companies have witnessed favorable earnings estimate revisions for the next year.
Southwest Airlines is based in Dallas, TX. Improvement in air travel demand bodes well for Southwest Airlines' top line. LUV’s solid balance sheet allows it to reward its shareholders through share buybacks and dividend payments.
LUV has an expected earnings growth rate of 107.4% for 2025. The Zacks Consensus Estimate for current and next-year earnings has been revised 37.5% and 8.1% upward, respectively, over the past 60 days. LUV currently sports a Zacks Rank #1 (Strong Buy).
Zacks Investment Research
Image Source: Zacks Investment Research
You can see the complete list of today’s Zacks #1 Rank stocks here.
SkyWest, founded in 1972, is based in St. George and operates regional jets for major U.S. airlines. SKYW’S track record of successfully meeting the requirements of each of its airline heavyweight partners bodes well for the company. Revenues from flying agreements (which account for the bulk of the top line) are impressive owing to SKYW’s above ability. Owing to an uptick in air travel demand, passenger volumes have been upbeat and are likely to increase going forward as well. This is likely to keep SKYW's top line in good shape.
SKYW, currently sporting a Zacks Rank #1, has an impressive earnings surprise history. The company's earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average surprise of 79.1%. The Zacks Consensus Estimate for current and next-year earnings has been revised 4.1% and 7.1% upward, respectively, over the past 60 days.
Zacks Investment Research
Image Source: Zacks Investment Research
United Airlines, based in Chicago, currently carries a Zacks Rank #2. The Zacks Consensus Estimate for current and next-year earnings has been revised 1.3% and 2.5% upward, respectively, over the past 60 days.
Strong air travel demand, supported by new routes, represents a major tailwind for UAL. The environment-friendly approach also bodes well for the company.
Zacks Investment Research
Image Source: Zacks Investment Research
Volaris, based in Mexico, currently carries a Zacks Rank #2. Upbeat air travel demand is aiding the company. Despite capacity reduction due to the engine inspections, the Mexican airline expects total revenues for 2024 to be close to 2023. The top line is being aided by an increase in base fares and ancillary revenue per passenger. In November, 2.6 million passengers were transported through various VLRS flights. Passenger volume increased 4% month over month.
Demand is likely to swell further, with management stating that booking trends are robust for the peak holiday season. The Zacks Consensus Estimate for current and next-year earnings has been revised 29.4% and 41.4% upward, respectively, over the past 60 days.
Zacks Investment Research
Image Source: Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
