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Shares of U.S. airlines, snubbed by investors concerned about the ongoing impact of the pandemic on air travel, could be set for a recovery in the first half of the year, analysts at B. of A. Securities said in a note that also highlighted three favorites in the sector.
Investor interest in airline stocks “is the lowest in recent memory,” the analysts said in the Friday note. “Times of poor sentiment are usually good times to buy airline stocks, and we can see the group outperforming as omicron fades, corporate travel returns, and a healthy consumer drives a strong spring/summer travel season.”
The U.S. Global JETS ETF
JETS,
has lost 0.6% in the past 12 months, contrasting with gains of around 23% for the S&P 500 index
SPX,
in the same period.
The B. of A. analysts upgraded their ratings on Delta Air Lines Inc.
DAL,
and Frontier Group Holdings Inc.
ULCC,
to buy to play that possible recovery. Upgrading Delta was B. of A.’s first buy rating on a network air carrier since the pandemic began, the analysts said.
“(We) prefer (Delta) over its network peers (American Airlines Group Inc.
AAL,
and United Airlines Holdings Inc.
UAL,
) given its stronger balance sheet (and no share dilution in pandemic), cheaper valuation, and more capacity discipline vs peers,” they said.
Among low-cost carriers, the analysts moved their ratings on Allegiant Travel Co.
ALGT,
to neutral as well as upgrading Frontier.
There are “heightened cost risks” for Allegiant given a recent 737 Max order from Boeing Co.
BA,
they said. The analysts lowered their ratings on Mesa Air Group Inc.
MESA,
to neutral “as we prefer exposure to mainline carriers.”
They kept Alaska Air Group Inc.
ALK,
as their preferred airline thanks to its “cost focus, strong balance sheet … and low valuation.”
Risks around a better 2022 include less corporate air travel, among the most profitable for U.S. airlines.
“We believe the biggest risk to airlines in 2022 is that a corporate recovery continues to be slow to materialize as companies ‘get used to’ operating with less travel,” they said.
Moreover, airlines will face a tough choice: They will need to rebuild capacity in order to drive down costs, “which also pressure yields, resulting in margins not reaching pre-pandemic levels for some time.”
