We recently compiled a list of the 11 Worst Aviation Stocks to Buy According to Analysts. In this article, we are going to take a look at where Frontier Group Holdings, Inc. (NASDAQ:ULCC) stands against the other aviation stocks.
The aviation industry has been one of the most important segments of the market in the 20th and 21st centuries. The future of aviation is closely tied to the broader landscape of mobility, which is important for economic growth, social connectivity, and access to services like trade, healthcare, and education.
According to the International Air Transport Association (IATA), the airline industry has made a strong recovery from the COVID-19 crisis, with global traffic surpassing pre-pandemic levels by February 2024. Domestic travel rebounded first, which reached pre-Covid levels by spring 2023, while international travel followed more recently.
However, the global network has shifted since 2019. China’s international travel recovered slowly due to the delayed easing of restrictions, economic uncertainties, and geopolitical issues. On the other hand, domestic travel in China hit record highs, driven by internal tourism. Routes between Asia and Europe continue to be affected by the war in Ukraine.
Most regions are expected to exceed 2019 traffic levels in 2024, with global passenger numbers forecasted to grow 10.4% year-over-year.
The report states that Asia Pacific is the fastest-growing region, which is projected to contribute over half of global passenger growth by 2043 and it is led by India and China. Despite risks like geopolitical conflicts and climate policies, improved economic conditions may boost demand.
Air connectivity, a main driver of global economic growth, is set to hit a record in 2024 with over 22,000 unique city pairs, aided by declining ticket fares. Meanwhile, air cargo demand has rebounded, driven by e-commerce and shipping disruptions. The global capacity is expected to increase further, though the cargo load factor will likely decrease as capacity exceeds demand.
Use of AI in the Industry
Like most industries of today, airlines are also implementing AI to improve the efficiency of their operations. According to an August report by CNBC, these companies are using AI for tasks like ground control, customer service, and optimizing flight routes.
American Airlines introduced its AI-powered “smart gating” system at its Dallas-Fort Worth control center. The tool automatically assigns gates to incoming flights, which cut runway taxi time by around 20%, or two minutes per flight, across five airports. The system also helps passengers, baggage, and crews make quicker connections, which improves overall efficiency.
Alaska is using AI to streamline flight paths and optimize aircraft turnaround times at gates. Its tool is described as “Waze for the skies,” and it uses AI to plan faster routes, which saves fuel and reduces delays. Additionally, the system monitors ground operations as it tracks when fuel, catering, and baggage trucks arrive and depart, which allows agents to address delays immediately.
United has implemented generative AI for customer service, especially during flight disruptions. The AI generates detailed, empathetic messages explaining delays, which has increased customer satisfaction by 4% since its rollout on 6,000 flights.
Despite these advancements, the airlines said that AI is not replacing jobs but is improving operational efficiency. AI tools allow airlines to improve areas where humans may struggle to handle complex tasks as efficiently. These things, like reducing flight delays or cutting minutes off turnaround times, aim to improve overall service without completely automating operations.
Our Methodology
For this article, we used stock screeners and ETFs to identify 65 companies above $50 million market cap that have significant operations in the aviation industry. We narrowed our list to 11 companies where less than 50% of the analysts that have covered the stock have Buy-equivalent ratings. In addition, we skipped stocks with an average analyst price target upside above 15%. The stocks are listed in descending order of their average analyst price target upside.
We also added the hedge fund sentiment around each stock which was taken from our database of over 900 elite hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An Airbus A320ceos ready to take off from the runway of the company’s corporate airport.
Frontier Group Holdings, Inc. (NASDAQ:ULCC)
Average Analyst Price Target Upside as of September 16: -8.47%
Number of Hedge Fund Holders: 16
Frontier Group Holdings, Inc. (NASDAQ:ULCC) is a holding company that offers passenger air transportation services through its subsidiaries. Frontier Airlines operates a fleet of over 100 A320 family aircraft. As per the company, it maintains the largest A320neo fleet in the Americas and provides service to approximately 120 destinations across the United States, the Caribbean, Mexico, and Central America.
For the second quarter, the airline reported GAAP EPS of $0.14, which surpassed analyst estimates by $0.04, but this figure was down from the $0.31 EPS recorded in the same period last year.
The company achieved revenue of $973 million, which was slightly higher year-over-year but fell short of estimates by $57 million. Net income for the quarter was $31 million, which was significantly down from $71 million in the previous year’s second quarter.
It ranks 4th on our list of the worst aviation stocks to buy according to analysts. Out of ratings by 12 analysts, the stock was given 9 Hold ratings and 2 Sell ratings. As of September 16, the average price target of $4.00 is 8.47% less than the present levels.
A key challenge for Frontier Group (NASDAQ:ULCC) has been the rise in operational costs. Total expenses for the quarter increased to $948 million from $888 million a year earlier. Despite efforts to cut costs, including a 6% reduction in cost per available seat mile (CASM), the airline still faces financial pressure. The increase in expenses is largely due to higher fuel and labor costs, alongside a competitive market that impacts pricing.
CEO Barry Biffle noted that while consumer travel demand remains strong during peak periods, the shifts in post-pandemic travel patterns have led the airline to focus its operations more on these peak times. With new revenue initiatives maturing and the airline’s cost advantages, Biffle anticipates that the airline will see margin improvements and become a leading low-cost carrier by 2025.
Despite its previous fears, Frontier Group (NASDAQ:ULCC) has updated its guidance for the third quarter, expecting a pre-tax margin ranging from flat to negative 2%. This is an improvement from the previous forecast of negative 3% to negative 6%. According to the airline, the better-than-expected revenue performance has contributed to this revised outlook.
Additionally, the airline plans to moderate its capacity growth to 4% to 5% year-over-year, down from earlier projections of 4% to 6%. The reduced growth rate is intended to help manage pricing pressures by limiting the number of seats that need to be filled.
Overall ULCC ranks 4th on our list of the worst aviation stocks to buy. While we acknowledge the potential of ULCC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ULCC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.