3 Airline Stocks Ready for Takeoff

Coronavirus-induced stay-at-home orders and border closures have wreaked havoc on the airline industry in 2020. Furthermore, a move to remote working during the pandemic threatens to significantly reduce corporate travel moving forward. Philanthropist and Microsoft co-founder Bill Gates recently said he expects business travel to disappear by over 50% longer-term. “My prediction would be that over 50% of business travel and over 30% of days in the office will go away,” Gates told the New York Times’ Dealbook conference, per CNBC.

However, over the past month, airline stocks have flown back into favor with investors after successful COVID-19 vaccine breakthroughs give hope that pre-pandemic travel levels may return as more people take to the skies. Below, we take a look at the three largest airline stocks by market capitalization.

Southwest Airlines Co. (LUV)

The Dallas-based low-cost carrier operates over 700 aircraft in an all-Boeing 737 fleet, primarily targeting leisure and independent small business customers. Although the Federal Aviation Administration (FAA) lifted its 20-month ban of the troubled Boeing 737 Max from flying passengers Wednesday, Southwest said the jet wouldn’t re-enter service until later next year. From a technical standpoint, the share price broke out above a nine-month downtrend line that may see it retest its pre-pandemic high at $58.83. The airline has a market cap of $27.35 billion.

Delta Air Lines, Inc. (DAL)

With a market cap of $25.67 billion, Delta flies to over 300 destinations in more than 50 countries. The company announced in September that it plans to borrow $6.5 billion, backed by its frequent-flyer loyalty program to secure liquidity to ride out the tail end of the pandemic.

More recently, the full-service airline canceled one in every five flights it was scheduled to operate on Thanksgiving Day amid crew shortages brought about by the health crisis. Turning to the charts, a recent cross of the 50-day SMA back above the 200-day SMA and breakout above a multi-month downtrend line may lead to further gains toward crucial overhead resistance at $51.

United Airlines Holdings, Inc. (UAL)

United Airlines operates as a full-service carrier through its strategically located hubs in San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. Last month, Raymond James’ airline analyst Savanthi Syth upgraded the airline’s stock to ‘Outperform’ from ‘Market Perform’ and reiterated the firm’s $60 price target.

Syth argues the company sits in a better position than its competitors for a travel revival after securing a pilot agreement through 2022. He also noted that United has no pending fleet retirements, allowing it to rapidly increase capacity when demand picks up. Moving on to the chart, a comprehensive breakout above a crucial downtrend line and the 200-day SMA could see the shares take flight to the January swing low at $74.34. The airline has a market value of $13.18 billion.

For a look at today’s earnings schedule, check out our earnings calendar.

Southwest Airlines Shares Drop About 3% as Rising COVID-19 Cases Stall Revenue Improvement

Southwest Airlines, the world’s largest low-cost carrier, said modest improvements in passenger demand and bookings seen in the past few months were fading due to recent surge in COVID-19 cases, sending its shares down about 3% in pre-market trading.

The U.S. low-cost carrier forecasts its fourth-quarter 2020 capacity to decline about 40% year-over-year. Southwest Airlines recently adjusted its January 2021 published flight schedule, and currently estimates its January 2021 capacity to dip in the range of 35% to 40% year-over-year.

“While the Company expected the election to impact trends, it is unclear whether the softness in booking trends is also a direct result of the recent rise in COVID-19 cases. As such, the Company remains cautious in this uncertain revenue environment,” Southwest added.

Southwest Airlines shares fell about 3% to $41.98 in pre-market trading on Thursday; the stock is down about 20% so far this year.

Southwest Airlines Stock Price Forecast

Thirteen equity analysts forecast the average price in 12 months at $47.40 with a high forecast of $59.00 and a low forecast of $40.00. The average price target represents a 9.67% increase from the last price of $43.22. From those 13 analysts, nine rated “Buy”, three rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $59 with a high of $90 under a bull-case scenario and $29 under the worst-case scenario. The firm currently has an “Underweight” rating on the world’s largest low-cost carrier’s stock. Southwest Airlines had its price objective increased by UBS Group to $52 from $48.

Several other analysts have also recently commented on the stock. Bernstein raised their price target to $44 from $29. Barclays increased their target price on shares of Southwest Airlines to $40 from $35. Wolfe Research cut shares to a peer perform rating from an outperform. Citigroup cut their price target to $36 from $38 and set a neutral rating.

Analyst Comments

“Southwest Airlines (LUV) is arguably the highest quality airline in the U.S. with a good balance sheet and high margins. As a largely US domestic medium-haul airline, we believe its network is in a sweet spot for a COVID rebound and it has one of the attractive loyalty programs with a loyal customer base,” said Ravi Shanker, equity analyst at Morgan Stanley.

“All of these make LUV the most resilient at the bottom and well-positioned for a recovery, especially being able to capitalize on share gain or M&A opportunities as other Airlines falter/lag.”

Upside and Downside Risks

Risks to Upside: 1) COVID Vaccine timing. 2) Industry Consolidation. 3) Industry Rationalization & Fare Stability – highlighted by Morgan Stanley.

Risks to Downside: 1) COVID Second Wave. 2) Alliance/Partnership Disruption/Breakage.

Check out FX Empire’s earnings calendar

Southwest Airlines Flies Above Resistance After Lifting September Load Factor

Southwest Airlines Co. (LUV) shares rose 3.67% Wednesday after the low-cost carrier raised its September Load factor and flagged that its cash burn in the third quarter will be lower than expected.

The Dallas-based airline lifted its load factor this month to between 45- to 50% from its previous forecast of 40- to 50%. Looking further ahead, it sees the metric ranging between 45- and 55% in October. On the revenue front, Southwest reaffirmed its expectation of a top-line contraction of 65- to 70% in September and expects October revenue to fall 65- to 75%. While operating revenue declined 70% in August, the figure came in 5% better than expected.

The airline, easily recognized by its Disney-themed livery on selected jets, said summer leisure demand trends have so far continued into the early fall. Moreover, the company expects its third-quarter (Q3) cash burn to slow to $17 million a day, less than its earlier forecast of $20 million per day.

Through Wednesday’s close, Southwest stock has a market capitalization of $24.83 billion and trades 21.67% lower on the year. However, performance has taken off over the past three months, with the shares gaining around 15% as of Sept. 17, 2020.

Shrinking Capacity

Southwest expects Q3 capacity to decline by 30- to -35%, followed by a fall of between 35- and 40% in November due to its decision to leave middle seats unbooked on flights through Nov. 30 as part of its ongoing social distancing protocols during the pandemic. “As we transition into autumn and the upcoming Thanksgiving holiday season, we want Southwest customers to have the confidence of knowing that middle seats will remain open through Nov. 30 to accommodate their fall travel plans,” said vice president Ryan Green, per USA Today.

Wall Street View

Sell-side analysts remain overwhelmingly bullish on the stock, impressed by the airline’s ability to attract holiday travelers amid a sharp slump in corporate demand. It receives 13 ‘Buy’ ratings and 8 ‘Hold’ ratings. No research firm currently recommends selling the shares. Twelve-month price targets range from as high as $54 to as low as $29, with an average consensus at $43.31. This indicates a modest upside gain of nearly 3% from Wednesday’s $42.10 close.

Technical Outlook and Trading Tactics

Southwest shares climbed to a five-month high Wednesday, closing comfortably above the 200-day simple moving average (SMA) on above-average volume. Given that the relative strength index (RSI) has recently moved into overbought levels, the stock may consolidate over the short-term before trying to push higher. Those who buy here should look to book profits near $48, where the price is likely to find overhead resistance from the August 2019 swing low. Protect capital by placing a stop-loss order somewhere beneath the 200-day SMA.