Inflation is affecting all sectors of the stock market, but perhaps none more than airline stocks. In mid-September, several airlines including Southwest Airlines (NYSE:LUV) and American Airlines (NASDAQ:AAL) are lowering profit expectations due to higher fuel costs.
This was particularly bad timing as the industry continues to manage labor difficulties which have caused flight delays. Although “revenge travel” continues to be robust, many industry analysts are concerned that, at some point, the consumer may simply be tapped out for air travel.
So, before investing in airline stocks, remember these will be long-term investments. The industry was showing weakness prior to 2020. The recovery will take time. But long-term investors may be rewarded for taking a calculated investment in some of the leading names in the sector.
Delta Air Lines (DAL)
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Even though travel demand has remained robust despite a weakening economy, many top airline stocks are trading below the 200-day moving average.
However, this hasn’t been the situation for Delta Air Lines (NYSE:DAL). The airline’s stock has found support around its 200-day separately managed account (SMA). Investors can only hope the bottom is intact.
On September 14, Delta joined other airlines in lowering its profit forecast for the remainder of 2023. The new range of between $1.85 and $2.05 takes into account higher fuel costs as well as higher-than-expected maintenance costs.
However, the news hasn’t been all bad for the carrier. Delta was projecting revenue to fall by as much as 4%. However, it’s now revealing that decrease will only be between 2% and 3%.
Also, the 15% decline in earnings is not likely to affect the company’s recently reinstated dividend. Thus, patient investors will have a reason to deal with any turbulence that may come from owning DAL stock.
United Airlines (UAL)
United Airlines (NASDAQ:UAL) hasn’t announced a downward revision to its future earnings. For now, investors can give some credibility to analysts’ forecasts for a 1.4% increase in profits.
Notably, the airline has approximately 15% market share. That makes it the fourth-largest carrier, but only a couple of percentage points behind the leader.
The airline may have an opportunity to pick up some additional share via international flights. The company has one of the most extensive portfolios of international routes, although that area hasn’t fully recovered.
United has been cleaning up its debt profile and isn’t currently offering a dividend. Still, investors can look at UAL stock and find that it’s significantly undervalued among airline stocks at just 4x forward earnings.
Global Jets ETF (JETS)
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The Global Jets ETF (NYSEARCA:JETS) is the industry’s only ETF dedicated to the airline industry. Until early September, the JETS ETF was trading above its 200-day SMA. However, since several airlines have lowered their profit forecasts, the industry’s lone ETF has moved lower.
One of the criticisms of the ETF points to a significant percentage of its holdings tied up in the “big four” airline stocks. Two of those are Delta and United. So, investors looking for exposure in the airline sector could simply buy shares of one or more of those companies.
That’s fair. But another option is to allow the ETF to take away the risk and volatility that comes with any single stock. The fund has over $1.5 billion of assets under management. It does, however, have a 0.60% expense ratio that could be higher than some investors would like.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.
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