Airline Stocks: What We Think of the Big Four Today

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar.

Summer vacation season is underway. Given what the major airlines are charging passengers for tickets, investors may naturally be wondering if there’s an investment opportunity in airline stocks today.

Air travel demand has rebounded more quickly from the pandemic than airlines’ ability to meet it; airlines remain constrained by a shortage of planes and personnel. As a result, airlines have recorded record revenue and profits. And investors have noticed: Airline stocks, as a group, have taken off, up about 25% for the year so far through mid-June. That’s about 10 percentage points ahead of the broader U.S. stock market for the year to date.

Can the rally in revenue, profits, and stock prices continue?

Well, Morningstar expects the operating environment for U.S. airlines in the next year or two to return to more normalized competitive dynamics after current supply constraints moderate. In fact, Morningstar’s latest analysis suggests that the 2023–27 period may resemble the 2015–19 period prepandemic, with declining fuel costs, a largely consolidated industry, and robust demand for air travel. But there are a few differences between those two periods. For one, airlines piled on debt to withstand the pandemic. Two, current high profitability will erase tax shields the airlines have enjoyed. And lastly, postpandemic labor agreements are adding costs to airlines.

Here’s where Morningstar lands today on each of the four major U.S. carriers.

Airline Stocks: Can the Rally Continue?

1. United Airlines UAL
2. American Airlines AAL
3. Delta Air Lines DAL
4. Southwest Airlines LUV

United Airlines stock is up more than 40% so far this year through mid-June. United’s debt and outlays for new planes constrain our valuation. We think United Airlines stock is worth $36 per share, and shares look very overvalued to us today.

The stocks of American Airlines and Delta Air Lines are both up around 30% this year. American’s leverage limits our valuation to $12.20 per share, and the stock is trading well above that. On the other hand, Delta is a more prudent operator, with the highest costs and revenue per seat in the North American market. We think Delta will continue to garner premium revenue, and we assign the stock a $41 fair value estimate. Delta’s shares look about fairly valued today.

Lastly, there’s Southwest Airlines LUV. Southwest’s stock is struggling this year, up less than 3% by mid-June. The carrier faced significant operational issues in late 2022, which led to a first-quarter net loss due to extra costs and lost revenue in January and February of 2023. It also announced revised expansion plans for 2023, which will mean fewer flights—and therefore less potential revenue, which will impact operating margins this year. We think Southwest stock is worth $42.90 per share, and the stock appears undervalued to us today.

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Morningstar analyst Nicolas Owens provided the research behind this segment.

Watch “Tesla Stock: The Impact of Opening the Supercharger Network” for more from Susan Dziubinski.