But airline stocks intrigue even renowned investors like Warren Buffett, and air travel is rebounding significantly now that COVID-19 is in the rearview. In this article, we'll look into airline stock trends for 2023 and the pros and cons of adding these companies to your portfolio.
What to Know About the Airlines in 2023
Few industries suffered more during the pandemic than airlines. With travel halted, even the best airline stocks plummeted in March 2020. Many are yet to fully recover to their previous highs, including the United States' "big three": American, Delta and United (more on them later).
When travel began to reopen, the airplane stocks were once again hit with a shock, this time by Russia's invasion of Ukraine, which sent oil prices skyrocketing and significantly increased the cost of fuel. Fueling planes is one of the most significant costs incurred by airlines, and the price per gallon reached multi-year highs in June 2022. The most recent Bureau of Transportation Statistics (BTS) report showed airline companies spent $4.63 billion on fuel in January 2023 at an average price of $3.28 per gallon. Consumption has rebounded near January 2019 levels, but costs remain elevated.
The Federal Aviation Administration (FAA) regulates air travel in the United States and oversees the certification of planes and pilots and the management of airports. Following the September 11 attacks, the Transportation Security Administration (TSA) created an additional safeguard for passengers and travel hubs.
Trends in the Airline Industry
The International Air Transport Association (IATA) projects a return to profitability for the airline industry in 2023. However, several headwinds remain in place for the beleaguered sector, and low stock prices still prevail.
- Staffing: Airlines had trouble finding pilots and flight attendants in 2022, and staffing remains a concern in 2023, primarily for pilots now demanding much higher wages.
- Costs: Wages aren't the only cost concerns airlines are dealing with; fuel remains expensive, although prices have dipped below 2022 peaks.
- Demand: After being cooped up for the better part of two years, travel demand rebounded sharply in 2022 and shows no signs of slowing down in 2023. Even the constant threat of recession has yet to cause consumers to rethink their travel plans.
Types of Airline Companies
Airline companies can break down by size, location and the type of service they offer passengers. For this article, we'll break down airline stocks based on the three distinct types of business models they employ to service customers.
Full-Service Carriers (FSC)
Also known as network or legacy airlines, these are the largest players in the industry that serve the broadest range of clients and business travelers. FSC airlines have large fleets of planes offering domestic and international travel with daily flights, rewards for frequent fliers and multiple classes of travel like business and first class. These firms are household industry names like United Airlines Holding Inc. (NASDAQ: UAL), American Airlines Group Inc. (NASDAQ: AAL) and Delta Air Lines Inc. (NYSE: DAL).
Low-Cost Carriers (LCC)
Below the full-service airlines are the low-cost carriers, which provide service to limited popular destinations and have smaller aircraft fleets. Frequent flier programs don't exist with these carriers, and they keep added perks to a minimum. An LCC aims to provide affordable and convenient travel to a centralized list of destinations, usually within the domestic airspace of the carrier's home country. In the United States, the most recognized LCC is Southwest Airlines Company (NYSE: LUV), which offers flights to 42 states. (Learn more about how to buy Southwest Airlines stock.) Other LCCs include JetBlue Airways Corp. (NASDAQ: JBLU) and Ireland's Ryanair Holdings PLC (NASDAQ: RYAAY).
Ultra-Low Cost Carriers (ULCC)
Finally, we have the ultra-low-cost carriers who offer the cheapest available tickets with no frills, luxuries or added services. If you've ever flown on a ULCC, you may have heard the phrase "bus in the sky," since that's what travel on one of these flights resembles. You won't find fancy drinks, movies or any other special amenities, and each additional service, like baggage check and seat selection, carries a fee. The ULCCs you're probably most familiar with are Spirit Airlines Inc. (NYSE: SAVE) and Frontier Group Holdings Inc. (NASDAQ: ULCC).
Features to Look for in Airline Stocks
Finding the best airline stocks to invest in requires a different evaluation than most stock research. Airlines face heavy regulation and unpredictable costs, and their stocks haven't always rewarded investors. Your reasoning must be sound if you plan to invest in these companies.
Overvalued airlines rarely make a good investment, so the first features you should look at are figures like enterprise value and debt-to-capitalization rate.
- Enterprise value: To find the enterprise value, take the company’s total market cap and add the value of all preferred stock, long and short-term debt and any minority interest claims. Take this total and subtract the company’s cash and cash equivalents (which is all current cash holdings plus bank deposits) and you’ll get the enterprise value. Calculating enterprise value requires some digging into the balance sheet.
- Debt-to-capitalization rate: Commonly used to measure a company’s solvency (always a pertinent issue with airlines), the debt-to-capitalization rate is found by taking the company’s total debt (short and long-term) and dividing it by total capital. Total capital is a combination of total debt plus shareholder equity. If the rate here is too high, it could show an airline using too much debt to finance its operations.
Airlines always seem cheap when using the price to earnings ratio, or P/E ratio (share price divided by earnings per share), so that's not an ideal metric for finding the best airline stocks to buy.
Free Cash Flow
Not only are airlines heavily regulated and beholden to fuel costs, but capital equipment in the industry is expensive. Airplanes are hard to make! And the equipment used to fuel them, service them and clean them also is costly. When evaluating airline stocks, monitor the free cash flow yield. Airlines with cash flow problems may struggle to fulfill their operating expenses.
Finally, airlines don't have the best reputations. In fact, you'd be hard-pressed to find another industry the public is sour on than the airlines. Part of this is due to management: many airlines mismanage customer relations and financial matters. Most major U.S. airlines have declared bankruptcy at one point or another (except Southwest). If you're buying airline stocks, ensure the company has a management team you believe in.
How to Add Airline Stocks to Your Portfolio
Interested in investing in airline stocks right now? Here's how to add these companies to your portfolio:
Step 1: Research airline companies.
Which types of airlines do you want to invest in? Low-cost carriers or big network carriers? Companies with regional transportation hubs or ones that travel the globe? Domestic companies or international firms? Determine your investment thesis and research the companies that fit your outlook.
Step 2: Open a brokerage account.
Once you've located your ideal airline investments, you'll need a brokerage account to buy shares. You can purchase airlines in typical taxable vehicles like cash and margin accounts or buy them for your traditional or Roth IRA.
Step 3: Decide how much capital to put toward airlines.
Airlines have lagged behind the market in recent years, but past performance doesn't predict future performance. Still, you never want to put too much capital into a single industry, especially one with a track record like the airlines. If you want a diverse portfolio, only devote a small amount of your overall capital to airline stocks.
Step 4: Buy your shares and monitor your investments.
Airline stocks are easy to find on most major brokerages, especially mega-cap stocks. Only buy shares of the companies you research and ensure they mesh with your long-term goals. How long do you plan on holding these airline stocks? Where are your take-profit points? What types of losses are you willing to endure? Keep track of your investments and exit positions when you reach your parameters.
If you don't want to research individual companies, you can buy a big chunk of the sector through airline ETFs. Some ETFs are broadly invested in the entire travel sector, which includes hotels, restaurants and other forms of transportation. The only available ETF with a clear focus on airlines is the U.S. Global Jets ETF (NYSE: JETS).
The Jets ETF only has $2 billion in assets, but it's the only way to get pure exposure to a broad selection of airlines without including other travel and transportation stocks. JETS offers exposure to the big three U.S. airlines, plus various regional and low-cost carriers. You'll also get exposure to Canadian airlines trading over the counter in the U.S., such as Air Canada and Bombardier Inc.
If you're willing to expand to the larger transportation sector, other ETF options come into play. The largest is the iShares U.S. Transportation ETF (BATS: IYT), which holds airlines along with railroad companies, delivery services, rideshare and trucking companies. Other transportation ETFs include the SDPR S&P Transportation ETF (NYSE: XTN) and the U.S. Sea to Sky Cargo ETF (NYSE: SEA).
You May Need to Wait for the Right Market Conditions
The airlines aren't for impatient investors. Over the last few years, the industry has been dragged through the proverbial muck. Profitability should return in 2023, although a recession later in the year could keep these stocks grounded.
When looking for airline stocks to invest in, it's important to remember the business layout. Government regulators are always looming over the industry, capital expenditures are high and inflated fuel prices can hinder the entire sector. Risk isn't the only thing to manage when investing in airline stocks — you'll also need to keep your expectations in line.
Still considering what the best airline stocks to buy are? Here are a few of the most frequently asked questions about airline stocks and the industry.
What is the best airline stock to buy now?
The best airline stock will vary depending on the time frame and goals of the investor. Airlines have been tricky investments for several years now; even Warren Buffett got tired of trying to figure them out. The definition of "best airline stock" always depends on the individual considering the investment.
What has happened with the airline industry over the past few years?
The airline industry suffered during the COVID-19 pandemic as it brought travel to a standstill. Once COVID faded and travel began to open up, rising fuel costs significantly hindered the airlines' ability to turn a profit. The last few years have not been kind to airline stocks.
Are airline stocks a good investment?
Airline stocks can be a tricky sector to invest in since these companies are heavily regulated, and fuel costs vary with commodity prices, which can be unpredictable. Airlines do well in good economies but suffer during recessions when consumers cut back on significant expenses like travel.