MW Looking for winning airline stocks this year? BofA says to avoid Southwest and JetBlue.

By Ciara Linnane

Carriers with greater exposure to premium travel will fare better this year, analysts say

Airline stocks were mixed on Friday after Bank of America upgraded American Airlines Group Inc. and downgraded Southwest Airlines Co. and JetBlue Airways Corp., predicting that the network carriers will continue to outperform low-cost airlines due to demand for premium travel.

The comments from analysts Andrew G. Didora and Samuel Clough echoed the view of Citigroup a day earlier on Southwest, which argued that valuation does not reflect earnings quality or free-cash-flow conversion in a world favoring premium products.

BofA said recent strong earnings from Delta Air Lines Inc. $(DAL)$ bode well for buy-rated United Airlines Holdings Inc. $(UAL)$, and American $(AAL)$, as it upgraded the stock to neutral from underperform.

"By contrast, pure domestic airlines have less exposure to these trends and trade at premiums, so we downgrade Southwest Airlines $(LUV)$ and JetBlue $(JBLU)$ to underperform from neutral," the analysts wrote in a Friday note to clients.

Delta set the stage with earnings and an outlook driven by premium demand, the note said. Premium outperformed main cabin by 6 points in the fourth quarter, said Delta, and along with loyalty accounted for 57% of 2024 total revenue. The airline has beefed up its premium offerings in response and expects that to drive growth this year.

Network carriers are also getting a boost from a recovery in corporate travel and growth in Atlantic routes, said the note.

Still, "while DAL painted a very positive picture of the revenue environment, the recent move in jet fuel (+8% YTD) pressures near term earnings, holiday timing has a bigger impact on leisure-oriented airlines, and capacity dynamics influence regional trends," the analysts wrote.

They highlighted the Easter shift this year to April 20 from March last year, which will move revenue to the second quarter from the first.

American should benefit from the same trends highlighted by Delta, said the note. The airline could realize outsize benefits from the return of corporate travel, given its $1.5 billion market share loss in the first half of 2024. BofA raised its price target to $20 from $12, or about 11% above its current price.

The outlook is less upbeat for Southwest and JetBlue, however, which have less exposure to corporate, premium and international routes.

"Both airlines trade at the high end of historical valuation ranges despite less exposure to the strongest industry trends and are exposed to execution risk as LUV expands its product offering (assigned/premium seats) and JBLU continues to fine-tune its network," the analysts wrote.

Read: Southwest Airlines to end hallmark open seating and offer extra legroom, but remains cautious on the rest of 2024.

They lowered their price target for Southwest by $31 from $33 but stuck with their $6.50 target for JetBlue.

Turning to some other airlines, BofA is expecting buy-rated Alaska Air Group Inc. $(ALK)$ is the one "with the most idiosyncratic opportunities given the ability to revamp the Hawaiian network," although they see risk to the company's first-quarter per-share earnings consensus after the spike in fuel costs.

Alaska announced a deal in early December to buy Hawaiian Airlines for about $1.9 billion.

See also: Alaska Air is latest airline to boost guidance on strong holiday travel demand

The analysts raised their price target or Alaska to $80 from $70, raised their target for Frontier Group Holdings Inc. $(ULCC)$ to $9 from $7.50 and for Allegiant Travel Co. $(ALGT)$ to $95 from $54.

See now: Spirit Airlines files for bankruptcy after tumultuous period in which two attempted mergers fell through

Southwest's stock was down 0.1% Friday, while JetBlue was flat. Delta Air was also flat and JetBlue was up 0.4%

American was down 0.3%. The U.S. Global JETS exchange-traded fund JETS was up 0.9% and has gained 50% in the last 12 months, while the S&P 500 SPX has gained 27%.

-Ciara Linnane

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January 17, 2025 11:39 ET (16:39 GMT)

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