Along with Summer Upon Us, these are my top 3 airline stock picks

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Summer is upon us, and it’s traditionally the time when families pack their bags and head out for a well-deserved vacation. Given that this is the first summer travel season in three years that resembles the one before, airlines and airports are preparing for what is expected to be a particularly busy three months.

At least two airlines, in fact, updated their second-quarter revenue projections last week, citing higher-than-expected demand. On Thursday, Southwest Airlines said it expects April-June revenue to rise 12% to 15% from the same quarter in 2019, up from previous projections of 8% to 12%. . This comes despite rising fuel prices, which are expected to be “more than offset” by increased revenues.

Based on current trends, Southwest “expects strong earnings and operating margins” in the second quarter and for all of 2022, the Dallas-based carrier said in an investor update.

JetBlue Airways also announced last Thursday that bookings continue to “exceed expectations” and the carrier could be on track to collect record revenue this summer. JetBlue expects “June revenue per available seat mile to be up more than 20%” compared to the same month in 2019.

As you may know, JetBlue is still trying to outbid Frontier Airlines in a bid to acquire rival low-cost carrier Spirit Airlines, even though Spirit has already agreed to merge with Frontier. That should tell you that airlines are scrambling to gobble up as much market share as possible ahead of the expected leisure travel boom.

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I am very pleased with the performance of airline stocks so far this year relative to the market. The Dow Jones US Airlines Index is up more than 3% year-to-date through Friday last week. Although the STOXX Europe Total Market Airlines Index was down 8% over the same period, it was still ahead of the S&P 500, which sold off largely on inflation concerns.

That said, below are three airline stocks I’m keeping an eye on as we head into the busy summer leisure travel season.

South West Airlines (LUV)

I’ll just say up front that Southwest has long been one of my favorite national carriers. As the original low-cost, no-frills airliner, it has decades of experience at the intersection of comfort and affordability.

There’s a lot more to love about Southwest than what I’ve already mentioned. The company holds the No. 1 spot in 23 of the top 50 markets in the United States, and the focus is currently on restoring the network to pre-pandemic levels, which could be achieved by 2023, if not sooner.

Southwest is also focused on maintaining its low cost advantage. This includes developing more efficient flight plans, optimizing maintenance scheduling and modernizing its revenue management system. In December 2021, the company signed a new credit card co-brand deal with Chase through 2030, which is already very lucrative. All combined, these initiatives are expected to add between $1.0 billion and $1.5 billion to earnings before interest and taxes (EBIT) by 2023.

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Rising jet fuel prices are concerning, but the good news is that Southwest is about 64% hedged for the rest of this year at around $60 a barrel. This puts the company in a better position than many of its larger counterparts, including American Airlines, United Airlines and Delta Air Lines, which are currently not covered.

Alaska Airlines (ALK)

The more I learn about Alaska, the more appealing I find it. Currently, the company appears to have the best balance sheet in the industry with a debt to equity ratio of 49%. Since the pandemic began, Alaska has been the first airline not to burn cash, the first to turn positive, and the first to turn profitable.

As the fifth-largest US carrier by fleet size and number of passengers, Alaska is moving toward a low-cost structure that is expected to match Southwest’s by the end of this year or next. The airline has consistently outperformed the domestic industry in operating margin over the past 20 years.

Unlike other airliners, the Alaska strives to have a single-type fleet, which should result in millions in savings in aircraft swaps, maintenance and reduced pilot training. For primary operations, Alaska will use the Boeing 737, while the Embraer will be used for regional operations. These initiatives should more than offset rising labor and airport costs.

Similar to the Southwest, Alaska covers its fuel costs. Half of its fuel needs are covered until the end of this year at a cost of 71 dollars a barrel.

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In 2016, Alaska merged with Virgin America with the goal of becoming the premier West Coast carrier. Today, its market share in key hubs continues to grow, including Seattle, Portland, Anchorage, San Francisco and Los Angeles. About 50% of its loyalty participants are in the Pacific Northwest.

Ryanair Holdings (RYAAY)

Now, for something a little different, let’s hop across the Atlantic to Ireland, where ultra-low-cost carrier Ryanair is headquartered. Europe’s largest airline, with flights to nearly 40 destination countries, Ryanair is well placed to capture a surge in demand for leisure travel as Europe abandons its Covid-related measures and restrictions.

To give you an idea of ​​how busy Europe could be this summer, European airspace manager EUROCONTROL recently said it expects traffic in the coming months to be at 90% pre-pandemic levels. This could be a huge boon for Ryanair, which reported an average of 2,815 flights per day in April.

Ryanair has been a leader in attracting climate-conscious customers, which is increasingly important in the European market. In June last year, the company took delivery of the Boeing 737-8200 “Gamechanger” aircraft, which claims to reduce fuel consumption by 16% per seat. In March 2022, Ryanair took delivery of 61 of these aircraft and plans to increase this number by a further 70 within the year.

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