We recently compiled a list of the 10 Worst Airline Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where Air Transport Services Group, Inc. (NASDAQ:ATSG) stands against the other airline stocks.
The airline industry is one of the most crucial industries to the global markets and supply chains. It did suffer quite significantly over the last 4 to 5 years mainly due to the pandemic. However, in 2024, the airline industry is projected to achieve operating profits of more than $49 billion, which is supported by strong demand and pricing power, according to a PwC report from January.
Passenger numbers are rebounding to almost pre-COVID levels, although full recovery of lost growth may take longer. However, there are still a few challenges that the industry needs to overcome, including supply chain and production quality issues, which are expected to continue impacting aircraft deliveries throughout the year.
Trends in Advancement of the Airline Industry
According to PwC, generative AI is set to change the industry by improving efficiency and customer service. Additionally, 2024 is an important year for increasing the use of Sustainable Aviation Fuel (SAF), with goals to reach 5-10% SAF by 2030. However, large investments are necessary to create the needed infrastructure.
We also discussed the role of AI in the industry in our article 11 Worst Aviation Stocks to Buy According to Analysts. Here is an excerpt from the article:
“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.”
North America Leading the Way
According to a KPMG report posted in January, the North American airline market has been the primary driver of global traffic growth and profitability, accounting for 56% of the IATA’s industry profit forecast for 2024. The region quickly recovered from the pandemic and achieved profitability in 2022, with transatlantic travel rebounding in the summer of 2023.
While low-cost carriers (LCCs) initially benefited from early domestic recovery, premium international travel demand has surged which favors the bigger airlines. The major carriers have seen strong demand for their premium services, which are driven by both leisure and business travelers. On the other hand, LCCs like Spirit and JetBlue have faced challenges, including softer demand, higher fuel and labor costs, and capacity constraints due to engine issues.
In June, IATA increased its profit forecast for global airlines in 2024 and now expects a net profit of $30.5 billion, which is higher than both the $27.4 billion expected in 2023 and the earlier 2024 forecast of $25.7 billion.
Some major expectations for 2024 include record revenue of $996 billion and 4.96 billion passengers, but ongoing supply chain issues are limiting aircraft deliveries. Cargo revenues are also declining from their pandemic highs but remain above 2019 levels.
IATA also highlighted the need for supply chain improvements and favorable public policy to support industry profitability and investments in sustainability.
Our Methodology
To select the 10 worst airline stocks according to short sellers, we used a Finviz stock screener to identify over 20 airline stocks. Next, we narrowed our list to 10 stocks with the highest short interest but were also the most popular among elite hedge funds, as of Q2 2024. Finally, these stocks were ranked in ascending order of their short interest.
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).
A wide angle shot of a modern commercial jetliner ascending in the sky.
Air Transport Services Group, Inc. (NASDAQ:ATSG)
Short Interest as % of Shares Outstanding: 5.48%
Number of Hedge Fund Holders: 14
Air Transport Services Group, Inc. (NASDAQ:ATSG) is an Ohio-based prominent provider of aircraft leasing and air cargo services, both domestically and internationally. With a fleet that includes converted freighter models such as the Boeing 767 and Airbus A321, it has established itself as a key player in the freighter leasing market.
The company operates through two main segments, Cargo Aircraft Management Inc. and ACMI Services. In addition to leasing aircraft, the company offers flight crews, insurance, and maintenance services, and even conducts aircraft conversions from passenger to freighter configurations. Its diverse client base includes delivery companies, freight forwarders, airlines, and government entities.
Air Transport Services (NASDAQ:ATSG) has faced challenges in recent months. In its second quarter, the company reported revenues of $488 million, a decline from $529 million in the same period last year. The drop in demand for air cargo services can be attributed to broader economic uncertainties and geopolitical issues, including ongoing conflicts like the situation in the Middle East. As a result, aircraft leasing and related revenues fell by 7%, despite the addition of fourteen new freighter leases during the quarter.
It is among the worst airline stocks according to short sellers. The ACMI Services segment reported a pretax loss of $7 million in the second quarter, a significant turnaround from the $24 million in earnings recorded a year prior. Additionally, ACMI Services faced rising expenses related to crew training, maintenance, and ground service rates, which compounded the challenges in this segment.
Despite these hurdles, analysts see potential in the company’s outlook. On August 12, Truist analyst Michael Ciarmoli raised the price target for Air Transport Services (NASDAQ:ATSG) from $14 to $15 and maintained a Hold rating.
The analyst mentioned that while the second quarter’s revenue fell short of expectations, the company exceeded its EBITDA and earnings per share estimates. The outlook for 2024 has also been adjusted positively, with expectations for approximately $526 million in adjusted EBITDA, which is a sign of an increase driven by recent aircraft leases and anticipated pricing improvements in the fourth quarter.
CEO Mike Berger expressed confidence that the company is on track to meet its revised goals, with an expectation for seasonal charter opportunities to enhance the performance of the ACMI Services segment. In the first half of the year, Air Transport Services (NASDAQ:ATSG) generated $107 million in positive free cash flow, and management anticipates further additions in the second half.
Overall ATSG ranks 8th on our list of the worst airline stocks to buy according to short sellers. While we acknowledge the potential of ATSG 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 promising and 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.