By Callum Keown
Red-hot holiday travel demand looks set to round off a bumper year for U.S. airlines in style. But the stocks can keep flying higher in 2025.
A number of carriers have already raised their fourth-quarter guidance this month after strong Thanksgiving travel and December trends, including Southwest Airlines, American Airlines, JetBlue Airways and Alaska Air. That has boosted the sector's shares.
It looks like the December holidays could be another boon for the sector. The Transportation Security Administration expects to screen close to 40 million passengers between Dec. 19 and Jan. 2, a 6.2% jump from 2023 levels.
The risk of a government shutdown, however, could make things difficult for the TSA. The agency's chief David Pekoske said 59,000 of its 62,000 employees are considered essential workers and would therefore keep working. However, he warned that an extended shutdown could lead to longer wait times at airports. Airline stocks may be OK, though -- they were largely unaffected during the last shutdown, between Dec.21, 2018 and Jan. 25, 2019.
That means the year can still end well. The second half of 2024 has been particularly strong for the industry. The top 10 busiest days in U.S. aviation industry have all occurred in 2024, and all since May: The 3.09 million passengers screened at airports on Dec. 1 set a new all-time record.
Robust travel trends have been reflected in the stock market. The U.S. Global JETS exchange-traded fund, which tracks the performance of airlines, has soared 53% since hitting its 52-week low in August and is up 32% in 2024.
Along with the guidance hikes, Donald Trump's election win has also helped the rally, as the president-elect is expected to take a lighter approach to regulation and taxes.
There are more reasons to suggest the gains can continue next year. Global airline revenue could hit $1 trillion in 2025, according to the International Air Transport Association's (IATA) outlook for next year. It also sees stronger profitability -- net profits of $36.6 billion, up from the expected $31.5 billion in 2024.
"This will be hard-earned as airlines take advantage of lower oil prices, while keeping load factors above 83%, tightly controlling costs, investing in decarbonization, and managing the return to more normal growth levels following the extraordinary pandemic recovery," IATA Director General Willie Walsh said.
Shares of the legacy carriers, typically more exposed to international routes and the growing popularity of premium travel, have outperformed. United Airlines stock is up 132% to $95.56 in 2024, the sixth-best performer in the S&P 500, while Delta Air Lines has jumped 50% to $60.38.
Despite the strong gains, investors may not yet have entirely missed out on the rally. Wall Street is confident that both United and Delta stocks can continue higher next year. United's average price target of $116 implies a 21% jump from current levels, while analysts think Delta can jump 30% to $78.57, according to FactSet data.
"Our investment call for 2025 is similar to our call in 2024, which is to own the industry leaders, i.e., the airlines producing the majority of the industry's profits, namely the Big 3: American, Delta and United, " Deutsche Bank's Michael Linenberg said in his industry outlook for next year.
The gap between industry "haves" and "have nots" is widening, he said, with low-cost carriers lagging behind. He estimated the trio will account for 97% of the U.S. airline industry's operating profit in 2024, with that trend continuing in 2025. Linenberg reiterated Buy ratings on all three stocks -- hiking his price target for United to $125 from $80, on American to $24 from $16, and on Delta to $80 from $60.
The recent surge in airline stocks led Jefferies analysts to consider earlier this month what happens if the sector returns to prepandemic multiples.
"We believe this may be the beginning of an airline re-rating back to levels seen prior to the pandemic, supported by a return to normalized operations with healthier balance sheets," analyst Sheila Kahyaoglu said.
If United stock, currently trading at a 63% discount to the S&P 500 on a price-to-2026-earnings basis, returns to its prepandemic average discount of 55%, then the shares could reach $126.56. That marks a 32% upside to current levels. With Delta, a move from a 59% discount to the pre-Covid 49% could lift shares 37% to $82.80, the analysts added.
Airline stocks have taken off this year, but it doesn't mean the rally is done yet.
Write to Callum Keown at callum.keown@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 22, 2024 02:00 ET (07:00 GMT)
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