We recently compiled a list of the 10 Best Airline Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Southwest Airlines Co. (NYSE:LUV) stands against the other airline stocks.
We also dive deep into trends in the commercial aviation industry, especially the impact the return of international travel to pre-pandemic levels has had on the airline industry.
The coronavirus pandemic wreaked havoc across the global airline industry. According to the International Air Transport Association (IATA), industry revenues slumped from $838 billion in 2019 to $384 billion a year later, registering a 54.1% downfall. However, the market has gradually recovered over the last few years and is on track for solid growth as international travel resumes worldwide.
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A report by UN Tourism in January this year stated that international tourism was recorded in 2023 at 88% of pre-pandemic levels, and is on track to return to levels before the coronavirus struck. The IATA anticipates global airline revenue to reach $996 billion in 2024, 19% higher than in 2019 and 1.5 times higher than the pandemic low of 2020.
The global travel recovery has been led by the Middle East, the strongest tourism market in 2023, as it welcomed 22% more travelers than it did in 2019, becoming the only region to prevail over pandemic levels. Europe reached 94% of the levels in 2019, while Africa stood at 96%. Asia Pacific has been rather slow, recovering only 65% of pre-pandemic levels as of last year.
The uptick in international travel is yielding solid returns this year. As of October 23, 2024, a major airline ETF issued by U.S. Global Investors has grown by 18.44% YTD, outperforming the broader market by 4.5%. Analysts at Forbes believe airline stocks are poised for strong growth during the second half of 2024 as fuel prices dip after long periods of price hikes. Fuel accounts for between 20-30% of airlines’ total costs. Moreover, airlines in the US are cutting down on excess domestic capacity after compressed margins during the summer season. The oversupply of seats has resulted in lower fares, and airline operators are determined to correct that. The deceleration of capacity, coupled with strong travel demand, will enhance their pricing power and improve earnings.
Hedge fund sentiment on airline stocks is also encouraging. Tony Bancroft from Gabelli Funds shared his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26. He noted a significant growth in aircraft orders, resulting in major aircraft manufacturers having a 12-year backlog of orders. Bancroft cited China as the primary catalyst driving robust demand.
According to the portfolio manager, the country represented 20% of all new aircraft orders as Chinese airlines strive to cater to the growing demand for travel among the middle class at home and in neighboring India. Bancroft also highlighted the rising middle class in the United States and other parts of the world that are increasing international travel, and contributing to the strength of the commercial aviation industry.
Methodology
We sampled stocks from ETFs with airline exposure and then picked the top 10 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
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 commercial Boeing 737 aircraft flying in the sky with the well-known SWABIZ logo on it.
Southwest Airlines Co. (NYSE:LUV)
Number of Hedge Fund Holders: 23
Southwest Airlines Co. (NYSE:LUV) is a major airline based in the United States, that offers flights from 117 airports across 11 countries. The low-cost carrier operates on a point-to-point model enabling direct flights between destinations, and eliminating the time and distance taken when traveling with airlines that require passengers to travel through a conventional hub.
During the second quarter of 2024, Southwest Airlines generated a revenue of $7.35 billion, beating expectations of $7.32 billion, and up 4.5% from last year. Net income for Q2 stood at $367 million, resulting in an EPS of 58 cents, which beat estimates, but was down 46% year-over-year. The company’s earnings continue to be burdened, partly driven by plane delivery delays from Boeing, which has depressed revenues and increased pressures on costs. The airline has also been greatly affected by dampened airfares amid overcapacity in the domestic market.
According to a September report in the Associated Press, the company’s shares have lost around half of their value over the past three years due to these factors, which has led to increased investor pressure to improve performance. Elliott Investment Management, a hedge fund, has launched a campaign to call a special meeting of shareholders to dump CEO Bob Jordan and replace two-thirds of the board of directors for underperformance.
The airline has recently announced plans to end its open-seating policy and begin offering premium seating, in a bid to elevate customer experience and drive shareholder value. Southwest Airlines expects revenue from its new seat model and extra legspace to be north of what it generates from its ancillary offerings. The company will also be starting red-eye flights in early 2025. Southwest has also been improving its operational systems, which helped the company stay largely unaffected by the global tech outage in July.
While hedge fund sentiment towards the company has dipped significantly – from 33 hedge funds having investments in the stock in Q1 to just 23 in Q2 – because of the ongoing headwinds, Southwest Airlines Co. (NYSE:LUV) continues to be one of the best airline stocks to buy according to hedge funds.
Overall LUV ranks 7th on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of LUV 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 LUV 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.