The Best Airline Stocks: Ranking The 6 Major Players - Sure Dividend

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The Best Airline Stocks: Ranking The 6 Major Players

Updated on March 26th, 2020 by Aristofanis Papadatos

Airline stocks used to be avoided by value and income investors, and for good reason. Airlines are highly vulnerable during recessions. They are also vulnerable to industry-specific forces that can erase profits for several years, or even drive some airlines out of business.

That’s why legendary value investor Warren Buffett had, for many years, avoided airlines and advised investors to do the same.

However, thanks to a series of bankruptcies and mergers, the airline industry has consolidated. As a result, the four major U.S. airlines–American Airlines (AAL), Delta Air Lines (DAL), United Airlines Holdings (UAL) and Southwest Airlines (LUV)–now have 80% market share.

Industry consolidation, along with falling oil prices, boosted profit margins across the industry, which is why Buffett changed his stance and purchased significant stakes in the four major U.S. airlines. All four airlines are among Buffett’s top 20 stock holdings.

You can see the entire list of Buffett’s biggest stock holdings here.

With all this in mind, we created a downloadable list of airline stocks. You can download an Excel spreadsheet of all airline stocks (with metrics that matter like dividend yields and price-to-earnings ratios) by clicking the link below:


This article will discuss our top 6-ranked airline stocks, according to the Sure Analysis Research Database. The stocks are ranked according to expected total returns over the next five years, listed in order of lowest to highest.

Table Of Contents

Industry Overview

Due to the industry consolidation, as well as better hedges against rising fuel prices and strict cost controls, many airlines have enjoyed strong profit margins in recent years.

Airlines also benefit from a secular trend, namely the increasing tendency of people to travel more. According to IATA, the U.S. and the global air traffic are expected to grow by 2.3% and 3.5% per year, respectively, over the next two decades.

However, airlines are now going through one of the fiercest downturns in their history due to the outbreak of coronavirus. Due to the measures taken by the U.S. government in an effort to limit the expansion of the virus, the air traffic has plunged approximately 80% over last year. The decline is even worse in other countries and the U.S. airlines may even be forced to ground their entire fleet very soon if the pandemic worsens.

About two weeks ago, IATA estimated that the current crisis will wipe off $113 billion of revenues in the aviation industry. Even worse, that estimate did not include the rapid expansion of the virus in the last two weeks.

These developments have caused the collapse of all the airline stocks. However, this does not mean that they have all become bargains. Most airlines carry high debt loads and hence they have a significant amount of risk. As a result, investors should be particularly careful in their selections.

In this article, we will compare the expected 5-year returns of the six major U.S. airlines found in the Sure Analysis Research Database. Stocks are ranked in terms of 5-year expected total returns, from lowest to highest.

Best Airline Stock #6: Southwest Airlines (LUV)

Southwest Airlines is the second-largest U.S. carrier based on market capitalization and carries more than 120 million people annually. Southwest stands out among its peers for its exceptional consistency. While its peers exhibit highly cyclical performance and tend to post losses during recessions, Southwest has remained profitable for 47 consecutive years.

Source: Investor Presentation

Southwest also stands out in its sector for two more reasons, namely its strong free cash flows and its low debt level. It is the only airline that has posted positive free cash flows in every single year in the last decade and has posted record free cash flows in the last 12 months through its most recent quarter. It also has by far the lowest debt-to-assets ratio. Its net debt is just $10.9 billion, which is less than five times its annual earnings.

Thanks to its strong balance sheet, Southwest enjoys by far the greatest rating from the three major credit rating firms in its peer group. Its superior balance sheet is of paramount importance, as it gives the company resilience during downturns. This helps explain its above mentioned consistency, which is unique in its sector.

The market obviously appreciates the unique consistency and the superior balance sheet of Southwest with a higher valuation multiple. The stock has held an average price-to-earnings ratio of 16.8 during the last decade, compared with single-digit ratios across the industry. As Southwest has by far the strongest balance sheet in its peer group, it is the most resilient airline during the ongoing coronavirus crisis. This helps explain the fact that the stock has incurred by far the smallest decline in this downturn.

In 2019, Southwest grew its revenue by 2% to an all-time high of $22.4 billion along with record earnings per share of $4.27. The results would have been much stronger if not for the grounding of the 737 MAX aircraft since March 2019. In December, Boeing (BA) agreed to pay $125 million to Southwest for the grounding of its 737 MAX aircraft but this amount covered just a part of the effect of the grounding.

As soon as the coronavirus outbreak subsides, Southwest will pursue growth via new flight routes. For instance, the company has entered the Hawaiian market and sees promising growth prospects in the area in the upcoming years.

It has also consistently repurchased its shares in recent years and is likely to resume its share repurchases as soon as the current downturn comes to an end. Overall, while profits will inevitably dive this year due to the grounding of most aircraft, we expect the airline to return to growth next year and earn approximately $6.80 by 2025.

While the 10-year average price-to-earnings ratio of the stock is 16.8, we believe that a fair earnings multiple for the stock is around 13.0. If the stock trades at this valuation level in 2025, it will trade at a stock price around $88. In addition to its 1.9% dividend, the stock is likely to offer a 20.2% average annual return over the next five years.

Although Southwest has the lowest expected return of the airline stocks, we believe that Southwest is the stock with the best risk/reward profile thanks to its strong balance sheet and long history of industry outperformance. These factors could protect Southwest more than the other airlines during the coronavirus crisis.

Best Airline Stock #5: Delta Air Lines (DAL)

Delta Air Lines is one of the largest international airlines, serving 304 destinations in 52 countries. Delta bought a refinery in 2012 in order to limit its risk of high jet fuel prices. However, a single refinery is not sufficient to eliminate this risk entirely. It limits the effect of an increase in the spread between the prices of jet fuel and crude oil but does not provide any protection against an increase in the price of crude oil.

In addition, Delta has proved incapable of hedging the fuel cost of the airline. It was hedging the fuel cost before the downturn of the oil market began in 2014. Consequently, it incurred heavy losses from those hedges. Then, due to that traumatic experience, it stopped hedging the fuel cost so it was exposed to rising jet fuel prices in the oil price recovery of 2016-2018.

On the other hand, Delta has more than quintupled its earnings per share in the last nine years, partly thanks to the increase of the portion of its revenues generated by its premium seats, from 18% ($6 billion revenue) in 2011 to 31% ($14 billion revenue) in 2019. The airline has also exhibited remarkable consistency, as it has achieved a pre-tax profit above $5.0 billion for five consecutive years.

Source: Investor Presentation

In 2019, Delta grew its revenue by 7.5% to $47 billion, thanks to 9% growth in premium product ticket revenue and double-digit percentage growth in loyalty and third-party maintenance revenue. The airline grew the number of its customers 6% over the prior year, to an all-time record of 204 million customers, with a record load factor of 86.3%. As fuel cost also fell 6%, Delta grew its adjusted earnings per share by 29%.

Delta has exceeded the analysts’ earnings-per-share estimates for 12 consecutive quarters. However, the airline recently pulled its guidance due to the outbreak of coronavirus, which has caused the domestic air traffic to plunge 80% over last year. As Delta generates 72% of its revenues from domestic flights, it will certainly be affected to a great extent. We now expect the airline to earn only about $1.40 per share this year.

On the other hand, we do not expect the coronavirus crisis to extend beyond this year and hence we view the long-term growth prospects of the company intact. We expect Delta to earn approximately $9.00 per share by 2025.

The stock also offers a ~6.0% dividend. Investors should consider the possibility that the dividend may be suspended for a few quarters due to the downturn but we expect Delta to restore it when the crisis subsides. Moreover, due to its depressed earnings this year, Delta is now trading at a price-to-earnings ratio of 19.2, which is much higher than its historical average of 8.3. If the stock reverts to its average valuation level within the next five years, it will trade around $75 by 2025. Therefore, Delta is likely to offer a 28.7% average annual return until 2025.

Delta is in better financial position than other airlines but it still has an appreciable debt load to service during the ongoing downturn. Its current liabilities (due this year) of $20.2 billion exceed its current assets of $8.2 billion by a wide margin while its net debt of $43.4 billion is certainly burdensome.

On the bright side, its interest expense is too low, at 5% of operating income. Even better, the U.S. Congress is expected to agree on a $61 billion rescue package for the aviation industry. Among other items, the package will include $25 billion in payroll grants and $29 billion in loans. Overall, we expect Delta to return to growth mode as soon as the downturn subsides, the latest next year.

Best Airline Stock #4: American Airlines (AAL)

American Airlines is the world’s largest airline in revenue and fleet size, with about 6,800 daily flights to more than 365 destinations in 61 countries. The company emerged from Chapter 11 bankruptcy in December 2013.
American Airlines has a volatile performance record, primarily due to its high sensitivity to fuel costs, as the company does not hedge its fuel cost.

In 2019, the company faced strong headwinds, namely disruption from union labor actions and the grounding of the 737 MAX model of Boeing. The airline has 24 MAX aircraft and has ordered another 76 aircraft from Boeing. Nevertheless, the company managed to grow its operating revenue and its earnings per share by 2.9% and 7.7%, respectively, thanks to continued strength in passenger demand.

The company has taken advantage of the cheap valuation of its stock and has aggressively repurchased its shares in recent years. In the last four years, it has reduced its share count by 38%. Share buybacks are likely to remain the main growth driver as soon as they resume, after the ongoing downturn. The company is also doing its best to improve its efficiency, e.g. close the gap to its peers in the load factor.

Source: Investor Presentation

However, American Airlines is facing the coronavirus outbreak, which has caused an 80% plunge in the domestic air traffic and an even greater decline in international flights. The downturn has caught the airline off-guard, with an excessive debt pile. The debt-to-assets ratio hovers around 100% lately while its net debt has climbed to $54.4 billion, which is about 27 times its annual earnings.

Moreover, its interest expense currently consumes 28% of its operating income. The company has posted negative free cash flows in each of the last three years due to its high capital expenses. All these factors render the stock by far the riskiest in its peer group in the ongoing downturn of the aviation industry. On a positive note, American Airlines has no material debt maturities over the next two years.

If the downturn does not last for more than a few months, we expect American Airlines to return to growth mode from next year and earn approximately $6.00 per share by 2025. We also believe that a price-to-earnings ratio around 8.0, which is in line with the historical average of the stock, is fair for this stock. Therefore, we expect the stock to rise to $48 by 2025. The combination of valuation multiple expansion, earnings-per-share growth, and dividends could produce total annual returns slightly above 30% per year over the next five years.

Investors should note that the dividend could be suspended due to the coronavirus outbreak, but it is likely to be restored after the end of the crisis. Moreover, the excessive debt load renders American Airlines the riskiest stock in the sector. Consequently, only those who are absolutely confident in the ability of the airline to service its debt should consider purchasing the stock.

Best Airline Stock #3: Hawaiian Holdings (HA)

Hawaiian Holdings is the largest air carrier in Hawaii, transferring about 12 million passengers per year. It has a market capitalization of $0.5 billion, the lowest among the airlines discussed in this article.

Hawaiian hedges its fuel costs but this is much easier said than done. To be sure, in the years 2012-2014, when the price of oil was trading around $100 per barrel, the airline posted poor earnings.

On the other hand, Hawaiian has improved its performance and its leverage in the last five years. However, Hawaiian is currently facing strong competitive pressure, as Southwest has entered the Hawaiian market. While Hawaiian has a dominant position in this market, the entrance of a strong competitor has exerted pressure on air fares and is likely to increase competitive pressure even further in the upcoming years.

Source: Investor Presentation

Due to this competitive pressure, the company reported flat revenues in 2019 and a 0.8% decline in the total number of passengers. Even worse, its earnings per share fell 15%, from $5.44 to $4.60, due to thinner margins.

Moreover, Hawaiian is highly vulnerable to the ongoing downturn that has been caused by the outbreak of coronavirus. The company has suspended most of its flights and thus it recently pulled its guidance for this year. It is important to note that Hawaiian is somewhat more vulnerable to downturns than its peers due to its lack of diversification and its tie to tourist traffic. This helps explain the ~60% plunge of the stock price in less than two months.

Due to the challenges facing Hawaiian, we assume a fair price-to-earnings ratio of 7.5 for the stock. In addition, we expect the company to earn approximately $4.50 per share by 2025, as the recovery from the coronavirus crisis from next year will probably be offset by the heating competition in its business. As a result, we expect the stock to trade around $34 by 2025. Adding the 4.7% dividend yield, the stock is likely to offer a ~32.4% average annual return over the next five years.

On the other hand, Hawaiian has a similar level of debt (relative to its small size) to Delta. Consequently, if the ongoing downturn extends much longer than currently expected, it could have problem servicing its debt. We also expect the airline to suspend its dividend at least for a short time, but restore it after the downturn fades.

Best Airline Stock #2: Alaska Air Group (ALK)

Alaska Air Group transfers 47 million passengers per year to more than 115 destinations in the U.S., Mexico, Costa Rica and Canada. The company operates with a low-cost business model in order to secure a significant competitive advantage over its peers.

In 2019, Alaska Air posted strong results. The company grew its revenue by 6%, primarily thanks to higher pricing, and grew its operating expenses by only 1%, mostly thanks to lower fuel costs. As a result, the airline grew its earnings per share by 44%, from $4.46 in 2018 to $6.42.

However, Alaska Air is now facing the crisis from the coronavirus outbreak, which has caught the company off-guard, with a high debt load. The company boasts of having some advantages compared to its peers in this crisis, and enough liquidity to weather the crisis.

Source: Investor Presentation

However, Alaska still has a high debt load, with its current liabilities exceeding its current assets ($3.2 billion vs. $2.0 billion). Plus, the company is trying to expand its liquidity by $500 million due to the downturn while it will also curtail $300 million from its capital expense program. The bailout for the aviation industry will certainly help Alaska Air but we still expect the airline to suspend its 5.2% dividend.

On the other hand, as soon as the downturn subsides, we expect Alaska Air to return to growth, and restore its dividend. We expect Alaska Air to grow its earnings per share to approximately $9.30 by 2025 thanks to new partnerships and the new Saver Fare seats of the company, which will be partly offset by higher expected labor and fuel costs. We also expect the stock to trade near its historical average price-to-earnings ratio of 11.0 by 2025.

As a result, we expect the stock to trade around $101 by 2025. The combination of valuation multiple expansion, earnings-per-share growth, and the 5.2% dividend lead to expected annual returns of 33.5% over the next five years.

Best Airline Stock #1: United Airlines Holdings (UAL)

United Airlines Holdings owns United Airlines and Continental Airlines and operates more than 4,500 daily flights to numerous domestic and international destinations.

United introduced 93 new routes in 2018, more than any other U.S. airline. Thanks to its strategy, United generates a much higher portion of its revenues from international flights than its peers.

Source: Investor Presentation

This growth strategy has already begun to bear fruit as evidenced by the impressive results of last year.

Thanks to its strong business performance in 2019, United reached its goal of annual earnings per share of $12.05 one year earlier than planned. Notably, the airline grew its adjusted earnings per share by 32%. It is also remarkable that United has exceeded the analysts’ earnings-per-share estimates in 15 out of the last 16 quarters.

However, much like its competitors, United is now facing the fierce downturn triggered by coronavirus. United is somewhat more exposed than its peers due to its international exposure, as international flights have been hit harder than domestic flights so far.

The company has already announced that it will reduce its international flights by 95% in April due to the collapse in demand that has resulted from coronavirus. Due to the impact of coronavirus on the business of United, the stock has plunged 64% in about two months.

Moreover, just like its peers, United has a high debt load, with its current liabilities exceeding its current assets by a factor of nearly 2. The company does not pay a dividend, and it will very likely pause its share repurchases.

Nevertheless, as soon as the coronavirus crisis attenuates, we expect United to return to growth mode. A significant portion of future growth will be driven by share repurchases. United has consistently taken advantage of its cheap valuation and has executed very efficient share repurchases. In the last four years, it has reduced its share count by 8% per year on average.

Thanks to its new routes and its efficient buybacks, we believe United could grow its earnings per share to approximately $17.50 by 2025. Moreover, we expect the stock to revert towards its historical average price-to-earnings ratio of 8.5 over the next five years and hence we expect the stock to trade around $149 by 2025. If this forecast materializes, the stock will offer a 35.2% average annual return over the next five years.

Final Thoughts

Airline stocks are basically leveraged proxies for underlying U.S. and global economic growth. As long as the economy grows, the airlines thrive but in the current downturn they are all going through excessive pressure due to their leveraged balance sheets.

United Airlines currently offers the highest 5-year expected return of the airline stocks. However, due to its high debt load and exposure to international flights, the stock carries a significant amount of risk, albeit with a high potential return as well.

Southwest offers the lowest expected return of the airline stocks, but we believe that it offers the highest risk-adjusted annual return over the next five years due to its lower risk profile. Its lower expected return results from the fact that the stock has incurred the smallest decline in the recent market sell-off.

Southwest has posted a profit for 47 consecutive years, whereas its peers have incurred heavy losses during recessions. Southwest also has by far the strongest balance sheet in its group. As the resilience in this downturn is of paramount importance, we believe that Southwest is the best choice right now for risk-averse investors.

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