United Airlines Challenges Delta For Industry Lead As American Lags
Although Delta has long been considered the industry leader, Link said United is her favorite airline pick. “United was the star this past quarter. United got it right in terms of capacity pricing and keeping costs low,” she said. “Delta had its run. I tend to like stocks that are a little more contrarian. The popular long is Delta; United has more of a mixed view.” The term “long” refers to stocks that are bought with the intention to hold them for a long time.
Year-to-date through July, airline stocks fell 0.7%, under performing the S&P 500’s 15.8% return, according to a report released Tuesday by Bank of America analyst Andrew Didora. In July, airline shares were down 6.9% compared to the S&P 500’s return of plus 1.1%.Through Monday, Delta shares were down 6% year-to-date, United shares were down 7%, Southwest was down 17% and American was down 31%. Link does not think stock market fluctuation on Monday and Tuesday was meaningful for airlines. “We’re not in a recession,” she said. “GDP is going to grow 2.5% this year.”
Like Link, Didora endorsed United, writing “Buy-rated UAL remains undervalued.” He noted that United is “one of the only airlines we forecast with 2025 EBITDAR ahead of 2019 levels.”
Meanwhile, “Delta was the most affected airline by last month’s CrowdStrike outage, quantifying the impact at $500M,” wrote Didora, who reduced his estimates as a result, although he maintained a buy rating.“We anticipate investors will look beyond the impacts from the outage,” Didora said. “Our estimates do not factor in any lingering impact or book-away from the outage, but we recognize that this could present a modest risk through the remainder of the summer.”
Link said she backs the effort by hedge fund Elliot Investment Management to make changes at Southwest. The carrier itself made one last month, when it said that after five decades of offering open-seat boarding, it would move to assigned seating, part of an effort to attract more premium passengersSouthwest has “lost its way,” Link said. “I’m not sure premium is going to play out for them. They don’t have the algorithms that others have. They could mess up the whole system. Do they under price? Do they overprice? What will the competition have to do in response? It adds uncertainty.”
As for American, CFRA analyst Zachary Warring wrote on Friday that “Before the pandemic, airline demand set new records each year during 2017-2019, but AAL managed to burn cash all three years. This was due to high debt and poor cost control rather than capacity growth or fleet modernization.
“Given its poor record in managing costs, responsible debt levels, and free cash flow, we favor AAL’s more efficient and less indebted peers to ride what we view as a rising tide in airlines in 2024-2025,” Warring wrote.
