Analyst Identifies 2 Airline Stocks as Structural Winners, Boosts Price Target and Upgrades Rating

Raymond James analyst Savanthi Syth upgrades Alaska Air Group, Inc ALK from Outperform to Strong Buy and raises the price target from $60 to $68.

The re-rating reflects ALK's exit of the seasonally weakest quarter (generally experiencing a weaker 1Q than most U.S. peers) and being able to unlock benefits from the A320 and Q400 fleet transition, likely to be complete by May. 

While favorable hedges in 2022 create a tougher Y/Y comp relative to most peers, and the A321 fleet transition in 2H23 and greater exposure to the Tech sector remain potential risks, Syth believes a relatively unimpaired balance sheet and commercial initiatives will support strong shareholder value creation in this historically well-managed airline.

Also Read: JetBlue Joins United, Delta To Pare Flights To Ease Congestion And Delays

Syth upgrades SkyWest Inc SKYW from Underperform to Market Perform.

Attrition levels appear to improve after the reset in regional pay rates and mainline hiring, moderating somewhat. 

While SkyWest remained cautious ahead of the peak summer season when mainline hiring could accelerate, the analyst believes it is a diminishing risk as summer draws closer. 

Qualifying captains from first officer remain the critical impediment as there does not appear to be a shortage of new first officer applicants, with the shortfall likely to take 18-24 months to address.

The near-term earnings do not provide valuation support, with SkyWest shares held up better than the earnings revisions. The re-rating reflects his continued view that SkyWest is well-managed, has a solid balance sheet (and owned assets), and will be a structural winner in the regional airline sector.

Among mainline U.S. airlines, Alaska, Delta Air Lines, Inc DAL, JetBlue Airways Corp JBLU, and Spirit have ratified new pilot deals or extensions, providing labor cost visibility.

ATC (Air Traffic Control) constraints remain an operational and cost risk heading into peak summer. Delta noted in March that ATC remains understaffed and the most significant threat to capacity, particularly in NYC.

Syth's fuel forecast assumes prices remain above 2019 levels despite an assumed economic slowdown and reflect a slower decline from current levels, with Brent still well above the forward curve.

The re-rating reflects lowered fuel price forecast, expected moderation in demand, and not a severe demand downturn. He believes airline stocks would perform well in a shorter and shallower downturn scenario (albeit not in the near term).

Price Action: ALK shares traded higher by 0.19% at $42.04 on the last check Monday.