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 Alaska Air Group, Inc. (NYSE:ALK) 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 passenger jet in the sky, performing its daily flight duties.
Alaska Air Group, Inc. (NYSE:ALK)
Number of Hedge Fund Holders: 30
Alaska Air Group, Inc. (NYSE:ALK) is an American airline holding company that owns Alaska Airlines, one of the largest airlines in North America.
It is one of the best airline stocks to buy according to hedge funds. Citadel Investment Group has the most dominant holding in the company, among hedge funds tracked by Insider Monkey, owning over 3.9 million shares valued at nearly $158 million, as of the end of Q2 2024. Driven by robust financial performance, hedge fund sentiment continues to improve as well, with the number of hedge funds investing in the company growing from 28 in Q1 to 30 at the end of the second quarter.
The company had another strong quarter in Q2, posting a revenue of $2.9 billion, the highest quarterly result in its history. Nearly $1 billion of this was contributed by premium segments. GAAP net income for the quarter was recorded at $220 million, while adjusted net income was recorded at $327 million. It also posted an industry-leading adjusted pre-tax margin of 15.8%.
Looking ahead, the company was encouraged by advanced bookings during Q3, especially for August and September, which were outpacing the expected capacity growth of 2-3%. However, it expects some pressure from labor costs, provided a tentative agreement with flight attendants for a 32% increase in compensation is ratified.
While final results for Q3 are still awaited, a major story broke on September 18, with Alaska Air Group, Inc. (NYSE:ALK) announcing a $1.9 billion acquisition of Hawaiian Airlines, after reaching an agreement with the U.S. Department of Transportation. The two airlines agreed to maintain key Hawaiian routes under a six-year agreement. The deal is set to further enhance Alaska’s strength and broaden its presence in both domestic and international markets.
This acquisition has led to a bullish sentiment around the stock. Wall Street analysts forecast a near 20% appreciation in Alaska’s share price while maintaining the stock’s Strong Buy rating.
Overall ALK ranks 4th on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of ALK 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 ALK 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.