Airline Stocks in 2023: 3 to Buy and 1 to Avoid

Despite growing economic uncertainties, the International Air Transport Association (IATA) expects the global airline industry to finally return to profitability in 2023 and post a net profit of $4.70 billion, the first profit since 2019. This indicates that the industry remains upbeat about travel demand.

A recent IATA poll of travelers in 11 global markets revealed that nearly 70% are traveling as much or more than they did before the pandemic. And, while the economic situation concerns 85% of travelers, 57% have no intention to curb their travel habits.

Furthermore, as per Forbes, demand for air travel has been strong since early 2022, and the mix of traffic has changed since before the pandemic, with leisure travelers taking up a larger percentage of the traffic. Also, the reopening of China should boost international travel.

On the other hand, higher pilot pays and staffing and aircraft shortages across the industry remain concerns. In a recent note, BofA Global Research estimated that the industry will need to hire about 5,200 pilots annually between 2024 and 2030.

Therefore, fundamentally strong airline stocks Deutsche Lufthansa AG (DLAKY), Air France-KLM SA (AFLYY), and Copa Holdings, S.A. (CPA) might be solid buys now. However, Spirit Airlines, Inc. (SAVE) is best avoided now due to its weak financials and bleak growth prospects.

Stocks to Buy:

Deutsche Lufthansa AG (DLAKY)

DLAKY operates as an aviation company internationally. It operates through Network Airlines; Eurowings; Logistics Business; Maintenance, Repair and Overhaul Services; and Catering Business segments. The company is headquartered in Cologne, Germany.

On January 18, DLAKY announced its aim to acquire a stake in the Italian national carrier Italia Trasporto Aereo S.p.A. (ITA Airways). It also submitted an offer to the Italian Ministry of Economy and Finance to conclude a Memorandum of Understanding (MoU) in this respect. As Italy is an important hotspot for business and private travel, this deal could amplify DLAKY's revenue streams.

DLAKY’s trailing-12-month levered FCF margin of 7.99% is 139.2% higher than the 3.34% industry average. Also, the stock’s trailing-12-month CAPEX/Sales of 7.55% is 155.1% higher than the 2.96% industry average.

DLAKY’s total revenue increased 93.4% year-over-year to €10.07 billion ($10.97 billion) in the third quarter ended September 30, 2022. Its adjusted EBIT grew 351% from the previous-year quarter to €1.13 billion ($1.23 billion). The company’s net profit amounted to €809 million ($881.66 million) compared to a net loss of €72 million ($78.47 million) in the third quarter of the prior year.

The consensus revenue estimate of $9.56 for the fiscal year ending December 2022 indicates a 48.1% improvement year-over-year. The company has surpassed the consensus revenue estimates in all the trailing four quarters, which is impressive.

The stock has gained 78.2% over the past six months and 35.3% over the past year to close its last trading session at $10.55.

DLAKY’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

DLAKY is also rated an A in Growth and a B in Value and Quality. Within the 31-stock Airlines industry, it is ranked first. To see additional POWR Ratings for Momentum, Stability, and Sentiment for DLAKY, click here.

Air France-KLM SA (AFLYY)

AFLYY and its subsidiaries provide passenger and cargo transportation services on scheduled flights in Metropolitan France, Benelux, the rest of Europe, and internationally. The company operates through Network, Maintenance, Transavia, and Other segments. It is headquartered in Paris, France.

On January 9, AFLYY placed its first sustainability-linked bonds for a nominal amount of €1.0 billion, linked to the company’s target to reduce its well-to-wake scope 1 and 3 jet fuel greenhouse gas emissions per revenue tonne-kilometer by 10% by 2025, compared to a 2019 baseline, as part of its 2030 SBTi approved objective.

The transaction will smoothen the company’s debt redemption profile over the coming years and provide additional leeway for AFLYY to deliver on its sustainable transformation plan, including its fleet renewal.

Its trailing-12-month levered FCF margin of 9.92% is 196.9% higher than the 3.34% industry average. The stock’s trailing-12-month CAPEX/Sales of 11.37% is 284.2% higher than the 2.96% industry average.

AFLYY’s revenue from ordinary activities increased 77.6% year-over-year to €8.11 billion ($8.84 billion) in the third quarter ending September 2022. Its income from operating activities grew 1328.6% from the year-ago value to €1 billion ($1.09 billion), while its EBITDA improved 111.2% year-over-year to €1.68 billion ($1.81 billion).

Analysts expect AFLYY’s revenue for the fourth quarter ended December 2022 to be $7.45 billion, indicating a 35.6% year-over-year growth. The company’s EPS for the same quarter is expected to increase 86% from the prior-year quarter. Additionally, AFLYY has topped consensus revenue and EPS estimates in each of the trailing four quarters.

The stock has gained 38.2% over the past three months to close its last trading session at $1.80.

AFLYY’s robust prospect is reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.

The stock is rated an A for Value and a B in Growth and Quality. It is ranked #2 in the same industry. To see additional POWR Ratings for Momentum, and Stability for AFLYY, click here.

Copa Holdings, S.A. (CPA)

Based in Panama City, Panama, CPA provides airline passenger and cargo services. The company offers approximately 204 daily scheduled flights to 69 destinations from its Panama City hub to 29 countries in North, Central, and South America and the Caribbean.

The stock’s trailing 12-month net income margin of 14.27% is 112.6% higher than the 6.71% industry average. Also, the stock’s trailing-12-month CAPEX/Sales of 18.26% is 516.8% higher than the 2.96% industry average.

CPA’s total operating revenue increased 14.3% from the same quarter in 2019 to $809.45 million in the third quarter that ended September 30, 2022. Its adjusted net profit rose 10.7% from the same quarter in 2019 to $115.06 million, while its adjusted EPS increased 18.8% from the 2019 third quarter to $2.91.

(CPA believes that comparisons with 2019 are more relevant than year-over-year comparisons due to the significant COVID-19 impacts in 2020 and 2021.)

Street EPS estimate of $4.09 for the fiscal fourth quarter (ended December 2022) reflects a rise of 106.6% year-over-year. Its revenue estimate for the same quarter of $889.15 million indicates an improvement of 54.6% from the prior-year quarter. Additionally, the company has topped consensus EPS estimates in each of the trailing four quarters.

Over the past six months, the stock has gained 44%, closing the last trading session at $92.32.

This promising prospect is reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system. CPA has an A grade for Quality and a B grade for Growth. It is ranked #7 in the same industry.

Beyond what we’ve stated above, we have also given CPA grades for Value, Momentum, Stability, and Sentiment. Get all CPA ratings here.

Stock to Avoid:

Spirit Airlines, Inc. (SAVE)

SAVE is an airline service provider that connects 85 destinations in 16 countries across the United States, Latin America, and the Caribbean. It sells tickets via its call centers, airport ticket counters, and several third parties, including online, traditional, and electronic global distribution channels.

SAVE’s trailing 12-month gross profit margin of 17.53% is 39.7% lower than the 29.06% industry average. Also, the stock’s trailing-12-month asset turnover ratio of 0.54% is 32.8% lower than the 0.81% industry average.

During the third quarter that ended September 30, 2022, SAVE’s total operating expenses increased 51.8% year-over-year to $1.38 billion. The company also reported an operating loss of $36.39 million compared to a profit of $14 million in the prior year’s quarter.

Also, its net loss and net loss per share stood at $36.38 million and $0.33 compared to a net income and earnings per share of $14.77 million and $0.14 in the previous-year quarter, respectively.

SAVE is expected to report a loss per share of $1.91 for the to-be-reported fiscal year ending December 2022.

Shares of SAVE have declined 19% over the past nine months to close the last trading session at $20.16.

SAVE’s poor prospects are reflected in its POWR Ratings. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The stock has a D grade for Sentiment and Quality. It ranks #27 in the same industry.

In addition to the POWR Ratings above, one can access SAVE’s ratings for Stability, Value, Momentum, and Growth here.

DLAKY shares were trading at $10.53 per share on Friday morning, down $0.03 (-0.24%). Year-to-date, DLAKY has gained 27.87%, versus a 5.98% rise in the benchmark S&P 500 index during the same period.