By Teresa Rivas

When it comes to airline stocks, the skies have rarely been friendly to investors.

The current environment is an exception.

"The U.S. airline industry is entering a goldilocks period," Redburn Atlantic analyst James Goodall wrote Wednesday.

He and other analysts are heralding boom times for carriers' stocks because a rational competitive environment and ongoing travel demand should bolster the industry. The main beneficiaries of those trends are the Big Three legacy airlines -- American Airlines, Delta Air Lines, and United Airlines.

Goodall upgraded American stock to Buy from Neutral on Wednesday, raising his price target to $24 from $18. He also reiterated Buy ratings on Delta and United, with ratings of $80 and $135, respectively.

Other strong operators like Alaska Air Group have also gotten analyst endorsements. These players have more flexibility, the thinking goes, than their budget-oriented peers, who struggle to attract valuable business travelers.

The thesis for Goodall and other airline bulls is that there are legitimate, if temporary, disruptions to the cyclicality that made airlines so hard to invest in for much of their history. In other words, it's different this time. (Famous last words?)

In the past, airlines tended to order new planes when they were flush with cash; when those planes were delivered, it caused a spike in capacity, forcing them to lower fares to the detriment of margins. Once that eventually corrected overcapacity, the cycle could begin again. But supply chain constraints have caused this cycle to break down, and the resulting dynamic is why airline stocks are a good investment right now, Goodall says.

"Massive issues within the aerospace supply chain -- from Boeing's well publicized production line shortfalls, new engine technology teething issues and a shortage of parts...have resulted in a substantial shortfall in deliveries since the pandemic," he writes.

It appears there will be a multiyear period when capacity is constrained as airlines deal with an older fleet of planes and have to wait longer for new ones. That limited supply, along with demand that has yet to wane, is a recipe for stronger prices.

"Capacity discipline -- something most airlines struggle with in normal periods -- should, therefore, be forced upon the airline industry in the medium to long term."

Delta and United have already seen big runs -- up 49% and 117% respectively over the past year, outperforming the Roundhill Magnificent Seven ETF's 36%. But Goodall sees more gains ahead for the two, as well as for American stock, thanks to stronger earnings and free cash flow. His American upgrade also takes into account its new lucrative credit card deal with Citi.

By contrast, Goodall has a Sell rating on Southwest Airlines and lowered his price target by $1 to $28. That's perhaps not surprising given all the problems at that airline. Southwest announced the first corporate layoffs in its history last week, and was hit with a government lawsuit in January related to late flights.

Even with Southwest stock's 8% losses year to date, it is still trading at a level that "implies a much larger margin recovery than we foresee."

Certainly, investors may be skeptical of airlines' long-term potential, and worried that multiple recent crashes and close calls are a headwind for the group.

However for now, a broader updraft seems intact. The stocks may no longer be selling for peanuts, but they still don't look as pricey as luxuries like extra leg room.

Write to Teresa Rivas at teresa.rivas@barrons.com

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February 26, 2025 15:14 ET (20:14 GMT)

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