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 United Airlines Holdings, Inc. (NASDAQ:UAL) 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 bird’s eye view of a large commercial jetliner taking off from an airport runway.
United Airlines Holdings, Inc. (NASDAQ:UAL)
Number of Hedge Fund Holders: 56
United Airlines Holdings, Inc. (NASDAQ:UAL) is a publicly traded company that owns and operates United Airlines, one of the leading carriers across the Atlantic and Pacific. The airline flies around 140 million passengers annually to over 300 destinations across six continents.
On October 15, the company reported robust results for the year’s third quarter. Top-line revenue reached $14.8 billion, expanding 2.5%, driven by a 4.1% increase in capacity and declining fuel prices. Despite setbacks from the CrowdStrike outage and suspension of flights to Aman and Tel Aviv amid the turmoil in the Middle East, net income for Q3 stood at $965 million, translating to earnings per share of $3.33 which beat analysts’ forecasts and United’s estimates made in July.
United Airlines shares have risen nearly 16% since the announcement of Q3 results. The closing price of $72.02 on October 16 was the highest since February 2020, before coronavirus was declared a pandemic. After higher-than-anticipated earnings during the quarter, the company’s board of directors approved a $1.5 billion share repurchase program to be executed beginning in Q4 and throughout 2025.
This would be the first share buyback program after Covid-19. The decision has been slammed by United’s flight attendants’ union. The Association of Flight Attendants-CWA (AFA), which represents crews of several carriers including United, stated that the money promised to Wall Street belonged to flight attendants who worked on the frontlines during the pandemic and the recovery period that followed.
The airline has been continuously facing labor pressures for some time. In August, it entered negotiations with the Teamsters union which is pushing for new labor contracts covering 10,000 aviation maintenance and related workers across the country, seeking higher wages, improved healthcare benefits, and safety standards.
However, despite these challenges, United’s prospects look promising. It has already entered Q4 at the back of strong momentum across the Atlantic having exited Q3 with RASM growth of over 4%. The company witnessed strong corporate demand across all regions in September and expects it to continue in the fourth quarter. EPS for Q4 is anticipated to be in the range of $2.50 to $3.00.
Wall Street analysts have consensus on United Airlines Holdings, Inc. (NASDAQ:UAL)’s Strong Buy rating, with an average share price upside potential of 6.38%. Hedge fund sentiment also continues to improve. The number of hedge fund holders having investments in the company has grown from 46 at the end of Q1 to 56 as of Q2, according to Insider Monkey’s database. United Airlines is currently the best airline stock to buy according to hedge funds.
Overall UAL ranks 1st on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of UAL 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 UAL 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.