Delta and United Maintain Strong Demand Trajectories in Challenging Airline Industry, Says Citi

Recent months have posed challenges for airline stocks due to rising fuel prices and the conclusion of the peak summer season. Citi analysts anticipate ongoing turbulence in the industry into early 2024.

Despite these challenges, Citi analysts led by Stephen Trent have downgraded earnings estimates and price targets for the Big Four U.S. airlines, which include Delta Air Lines, United Airlines Holdings, Southwest Airlines, and American Airlines Group.

However, Delta and United are still rated as Buy, while Southwest and American shares are rated as Neutral.

The analysts noted in a research report that the current scenario of high oil prices, economic slowdowns in major economies, and a strengthening U.S. dollar may not be a long-term trend but could persist at least until early 2024.

“Against this backdrop, Delta and United look strongest among the Big Four, owing to their international exposure and strong co-branded card spend,” wrote the analysts.

Delta’s new price target is $56, down from the previous $64, while United’s target is $84, down from $76. Southwest’s price target decreases to $28.50 from $32.75, and American’s target is adjusted to $13 from $15.25.

Southwest faces challenges related to improving operations and an ongoing dispute with pilots over pay, according to the analysts. American’s balance sheet and higher capital expenditure (capex) expectations for the next year are potential vulnerabilities.

As earnings season approaches, beginning with Delta next week, the outlook for each carrier’s demand will be a crucial factor to monitor, the analysts emphasized. Based on Citi’s estimates, Delta and United appear well-positioned to maintain strong demand trajectories compared to their Big Four counterparts.

The U.S. Global Jets exchange-traded fund (JETS) has experienced a 26% decline from its peak in July. Given several airlines’ reduced guidance ahead of the third-quarter earnings season, forecasts for the fourth quarter will be closely scrutinized to determine whether any of the stocks can stage a late-year recovery.

Sources: AirGuide Business airguide.info, msn.com, barrons.com