A robust summer travel season and improving international and business travel helped major US airlines post profits in the second quarter. However, many carriers fell short of Wall Street earnings expectations as they battle sky-high fuel costs and operational challenges, mostly due to staffing issues. Airlines have increased ticket prices to mitigate the impact of rising costs. US airlines are also reducing capacity to ensure they meet demand with available resources and avoid flight cancellations or delays. This makes airline actions a random proposition.
Looking ahead, as demand remains strong, US airlines have warned investors of industry-specific operational challenges, rising fuel prices and an economic slowdown.
With that in mind, I used the TipRanks stock comparison tool to compare the stocks of the following airlines and pick the one Wall Street analysts are most bullish on.
Here are the three stocks I will be comparing today:
|LAU||United Airlines Holdings, Inc.||$36.31|
|DAL||Delta Air Lines, Inc.||$31.33|
|AAL||American Airlines Group Inc.||$13.56|
Airline stocks: United Airlines (UAL)
United Airlines (NASDAQ:LAU) generated adjusted earnings per share (or EPS) of $1.43 in the second quarter (Q2), marking its first profitable quarter without federal assistance since the start of the pandemic. However, the company failed to beat analysts’ revenue and profit expectations.
Robust demand, particularly for leisure travel, helped United generate revenue of $12.1 billion, up 6.2% from the second quarter of 2019.
However, United have significantly scaled back their growth plans for 2023 amid current challenges. It now expects capacity in 2023 to grow no more than around 8% from 2019, down from initial expectations for growth of 20%.
After printing, cowen Analyst Helane Becker cut her price target for UAL stock to $75 from $86.50, but maintained a “buy” rating. Becker said the primary concern for investors appears to be forecast aircraft capital spending of $20 billion over the next four years as the company aims to replace older planes with more fuel-efficient models.
Overall, Wall Street analysts are cautiously bullish on UAL shares, with a consensus “moderate buy” rating based on four “buys”, six “holds” and one “sell” rating. At $47.67, United Airlines’ average price target implies 31.39% from current levels.
Delta Air Lines (DAL)
Delta Airlines’ (NYSE:DAL) Second-quarter revenue increased 10% to $13.8 billion. However, Adjusted EPS of $1.44 was significantly lower than expected due to the impact of operational disruptions and rising costs. Delta expects revenue growth in the range of 1% to 5% on capacity 15% to 17% below its 2019 levels.
Delta now expects its full-year capacity to be 15% lower than in 2019, reflecting a 5% reduction from its original forecast. That said, Delta remains confident that it will generate “meaningful profitability” in 2022. Management reassured investors on achieving 2024 targets for EPS of over $7 and free cash flow of over $7. $4 billion.
Citigroup (NYSE:CITI) analyst Stephen Trent thinks the sell-off in DAL shares after second-quarter results seems overdone. The analyst noted that the company’s margins and cash flow have improved, but the stock has fallen to mid-2020 levels. Delta generated $1.6 billion of free cash flow in the second quarter.
Trent said the market may not fully price in the course correction in Delta’s flight schedules, which should lead to more normalized operations in the third quarter, as well as improved margins. He also believes that Delta is well-
positioned to weather an economic downturn. In line with his optimism, Trent launched a positive 90-day catalytic watch on DAL shares and maintained a “buy” rating.
Overall, Delta earns a consensus “Strong Buy” rating based on nine “Buys” and two “Holds.” Delta Air Lines’ average price target of $47.55 suggests upside potential of 51.72% from current levels.
Airline stocks: American Airlines (AAL)
American Airlines (NASDAQ:AAL) generated adjusted EPS of 76 cents in the second quarter, but remained below the analyst consensus estimate of 77 cents. Like rival United, American also made its first quarterly profit since the pandemic began in 2020.
American’s second-quarter revenue increased 12.2% to $13.4 billion from the comparable quarter of 2019. The company expects third-quarter revenue to grow in the range of 10% to 12%, with capacity 8% to 10% lower than 2019 levels. Meanwhile, American is focused on debt reduction and is on track to reduce its debt level by $15 billion by the end of 2025.
While American said it expected to be profitable in the third quarter, shares fell on the results. Investors are worried about the decline in capacity, despite robust demand.
In reaction to the second quarter results, Trent cut its price target for AAL stock to $16 from $16.75 and reiterated a “hold” rating. As American generated its first profit since the onset of Covid-19, Trent believes investors may need more evidence to determine whether the company can sustain its improved unit economics in the coming quarters.
Overall, Wall Street analysts are sidelined on American Airlines stock, with a consensus “hold” rating based on six “holds” and two “sells.” American Airlines’ average price target of $15.14 implies upside potential of 11.57% from current levels.
Major airline stocks are in the red on looming recession fears. Investors are concerned about the impact of a slowdown in consumer spending on travel demand and profitability issues, given high fuel prices and labor costs.
Nevertheless, Wall Street analysts see the most potential in Delta. They estimate a higher upside potential for DAL stock compared to the other two.
Delta continues to modernize and optimize its fleet as part of its efforts to improve long-term margins. Along with the new A220-300 aircraft, Delta is also adding 100 Boeing 737 MAX aircraft to its fleet, with the new aircraft expected to be 20-30% more fuel efficient.
As of the date of publication, Sirisha Bhogaraju had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Sirisha Bhogaraju has over 15 years of experience in financial research. She has written in-depth research reports and covered companies in various industries, primarily focusing on the consumer sector. Sirisha holds a master’s degree in finance.