With the growing demand across passenger and air cargo segments due to rising international trade, increasing urbanization, and economic growth, the airline industry is experiencing substantial expansion. Further, with government initiatives toward upgrading airline infrastructures, the market will grow significantly.
Given the industry tailwinds, fundamentally sound Airline stocks SkyWest, Inc. (SKYW), International Consolidated Airlines Group S.A. (ICAGY), Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS), and Air Canada (ACDVF) could be ideal buys for potential gains.
According to the data released by the International Air Transport Association (IATA), total passenger demand, calculated in revenue passenger kilometers (RPKs), grew by 21.5% in February 2024 compared to the previous year. Total capacity in available seat kilometers (ASK) increased 18.7% year-on-year, and the February load factor was 80.6%.
Also, the air cargo total demand, measured in cargo tonne-kilometers (CTKs), witnessed a double-digit growth of 11.9% compared to February 2023 levels, marking the third consecutive month of double-digit year-on-year demand growth.
The airline market size stood at $523.04 billion in 2023 and is expected to reach $566.06 billion in 2024, expanding at a CAGR of 8.2%. Factors boosting market growth include deregulation of the airline industry, globalization and open skies agreements, and strategic alliances and mergers.
Furthermore, the Federal Aviation Administration (FAA) allocation of $20 million to 20 airport-owned airport traffic control towers across the country, spanning 17 states, will enhance the airline infrastructure. The stated funds will be applied to upgrade existing or build new control towers fostering the segment’s growth widely.
Besides, the Flights market is expected to witness a significant surge in revenue, exhibiting a CAGR of 3.8% during the forecast period (2024-2028), resulting in a projected market volume of $0.73tn by 2028. Also, online sales will contribute 89% of the total revenue by 2028.
In light of these encouraging trends, let’s look at the fundamentals of the four best Airlines, beginning with number 4.
Stock #4: SkyWest, Inc. (SKYW)
SKYW engages in the operation of a regional airline. It operates in SkyWest Airlines and SWC; and SkyWest Leasing segments. Also, it is involved in leasing regional jet aircraft and spare engines to third parties, alongside the provision of on-demand charter, airport customer, and ground handling services.
On March 3, 2024, SKYW entered into a new flying agreement with United Airlines Holdings, Inc. (UAL) to place 20 partner-financed E175s under a four-year contract. The 20 E175s joined the SKYW’s fleet throughout 2024. By the end of 2026, SKYW is set to operate a total of 278 E175 aircraft, which will expand and strengthen its strong position in the market.
SKYW’s forward non-GAAP P/E of 10.32x is 44.5% lower than the industry average of 18.61x. Further, the stock’s forward EV/EBITDA multiple of 5.88 is 48.5% lower than the industry average of 11.42. Likewise, its forward Price/Book of 1.31x is 50.5% lower than the industry average of 2.65x.
SKYW’s trailing-12-month EBITDA margin of 16.68% is 21.8% higher than the industry average of 13.69%. Similarly, the stock’s trailing-12-month levered FCF margin of 7.66% is higher than the industry average of 6.61%.
For the fourth quarter that ended on December 31, 2023, SKYW’s total operating revenues increased 10.4% year-over-year to $751.79 million. Its operating income came in at $27.62 million, against an operating loss of $35.06 million in the prior year’s quarter.
In addition, the company’s net income and EPS were $17.52 million and $0.42 for the quarter, respectively.
Street expects SKYW’s revenue and EPS for the second quarter (ending June 2024) to increase 15.2% and 389.5% year-over-year to $836.19 million and $1.71, respectively. Furthermore, the company surpassed the consensus EPS estimates in each of the trailing four quarters.
SKYW’s stock has gained 65% over the past six months and 190.5% over the past year to close the last trading session at $67.72.
SKYW’s solid outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Growth. It also has a B grade for Sentiment and Quality. Within the Airlines industry, SKYW is ranked #8 out of 26 stocks.
Click here to access additional ratings of SKYW (Momentum, Value, and Stability).
Stock #3: International Consolidated Airlines Group S.A. (ICAGY)
Headquartered in Harmondsworth, United Kingdom, ICAGY engages as a passenger and cargo transportation services provider in the United Kingdom, Spain, the U.S., and worldwide. It operates under British Airways, Iberia, Vueling, Aer Lingus, and LEVEL brands and functions through a diverse fleet of 582 aircraft.
In terms of forward EV/Sales, ICAGY is trading at 0.61x, 65.2% lower than the industry average of 1.74x. Likewise, the stock’s forward Price/Sales multiple of 0.30 is 79.2% lower than the industry average of 1.45. Further, its forward non-GAAP P/E of 4.16x is 77.6% lower than the industry average of 18.58x.
ICAGY’s trailing-12-month EBIT margin of 12.34% is 22.1% higher than the respective industry average of 10.11%. Also, the stock’s trailing-12-month ROCE of 100.4% is 730.6% higher than the industry average of 12.09%.
For the fourth quarter that ended December 31, 2023, ICAGY’s total revenue grew 13.1% year-over-year to €7.22 billion ($7.69 billion), of which its Passenger revenue increased 15.7% from the year-ago value to €6.29 billion ($6.70 billion). The company’s operating profit came in at €502 million ($534.17 million), an increase of 5.2% from the prior year’s quarter.
In addition, the company’s profit after tax of €504 million ($536.30 million) indicates a growth of 117.2% year-over-year. Its free cash flow increased 34.8% from the prior year’s quarter to €1.32 billion ($1.40 billion).
Analysts expect ICAGY’s revenue for the fiscal year (ending December 2025) to increase 4% year-over-year to $34.27 billion, and its EPS is expected to grow 15.9% year-over-year to $1.06. Moreover, the company has topped the consensus EPS estimates in each of the trailing four quarters, which is impressive.
Shares of ICAGY have surged 12.4% over the past six months and 11.8% over the past year to close the last trading session at $3.98.
ICAGY’s POWR Ratings reflect its bright prospects. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
ICAGY has an A grade for Value and a B grade for Stability. The stock is ranked #5 among 26 stocks in the same industry.
In addition to the POWR Ratings I’ve just highlighted, you can see ICAGY’s ratings for Growth, Sentiment, Quality, and Momentum here.
Stock #2: Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS)
Based in Mexico City, Mexico, VLRA provides air transportation services for passengers, cargo, and mail internationally. It operates 590 daily flights and, as of December 31, 2022, had leased 116 aircraft and 23 spare engines. The company also provides merchandising, travel agency, loyalty programs, and specialized and aeronautical technical services.
During March 2024, VLRS reported that its load factor increased by 1.3 pp year-over-year to 86.8%, as RPMs decreased by less than capacity. Also, its Mexican domestic RPMs decreased by 24.2%, while the international RPMs grew by 7.1%. During the month, VLRS transported 2.3 million passengers.
In terms of forward EV/EBITDA, VLRS is trading at 4x, 65% lower than the industry average of 11.42x. Further, the stock’s forward Price/Sales multiple of 0.27 is 81.7% lower than the industry average of 1.46. Likewise, its forward Price/Cash Flow of 1.53x is 89% lower than the industry average of 13.90x.
VLRS’ trailing-12-month levered FCF margin of 13.80% is 108.8% higher than the industry average of 6.61%. In addition, the stock’s trailing-12-month CAPEX/Sales of 14.52% is 389.2% higher than the 2.97% industry average.
During the fourth quarter that ended December 31, 2023, VLRS’ total operating revenue increased 9.6% year-over-year to $899 million. Its operating income grew 173.3% from the year-ago value to $164 million. Its net income and EPS came in at $112 million and $0.10, against a net loss of $22 million and $0.02 per share from the prior year’s quarter, respectively.
In addition, the company’s adjusted EBITDAR of $281 million indicates growth of 35.1% year-over-year. Its total assets stood at $5.16 billion as of December 31, 2023, compared to $4.47 billion as of December 31, 2022.
As per the company’s guidance, VLRS expects CAPEX of $300 million for the fiscal year 2024.
Street expects VLRS’ revenue for the fiscal year (ending December 2025) to increase 8% year-over-year to $3.29 billion. Its EPS for the same year is expected to grow 83.7% year-over-year to $0.60.
VLRS’ shares have gained 4.4% over the past six months to close the last trading session at $7.05.
VLRS’ sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has a B grade for Growth, Value, Sentiment, and Quality. Within the Airlines industry, VLRS is ranked #4 out of 26 stocks.
In addition to the POWR Ratings highlighted above, you can check VLRS’ ratings for Stability and Momentum here.
Stock #1: Air Canada (ACDVF)
Headquartered in Saint-Laurent, Canada, ACDVF provides domestic, U.S. transborder, and international airline services. It offers scheduled passenger services under the Air Canada Vacations and Air Canada Rouge brand names. The company operates a fleet of 203 aircraft under the Air Canada brand name and provides air cargo services in more than 50 countries.
In terms of forward non-GAAP P/E, ACDVF is trading at 4.95x, 73.4% lower than the industry average of 18.58x. Further, the stock’s forward EV/Sales multiple of 0.51 is 70.6% lower than the industry average of 1.74. Also, its forward Price/Sales of 0.28x is 80.4% lower than the industry average of 1.45x.
ACDVF’s trailing-12-month gross profit margin and EBIT margin of 33.54% and 10.55% are favorably compared to the respective industry averages of 30.78% and 10.11%. Likewise, the stock’s trailing-12-month net income margin of 10.42% is considerably higher than the industry average of 5.86%.
For the fourth quarter that ended December 31, 2023, ACDVF’s operating revenues increased 10.6% year-over-year to C$5.18 billion ($3.76 billion). Its net income grew 9.5% from the year-ago value to C$184 million ($133.58 million), and its EPS stood at C$0.41.
Furthermore, the company’s adjusted EBITDA was C$521 million ($378.24 million), up 33.9% from the prior year’s quarter. And its free cash flow of C$669 million ($485.68 million) indicates growth of 109.1% year-over-year.
Analysts expect ACDVF’s revenue for the fiscal year (ending December 2025) to increase 5.4% year-over-year to $17.82 billion, while its EPS is expected to grow 11.2% year-over-year to $3.01, respectively. Further, the company surpassed the consensus revenue and EPS estimates in all of the trailing four quarters.
Over the past month, the stock has soared 3.5% and marginally over the past six months to close the last trading session at $13.40.
ACDVF’s strong prospects are reflected in its POWR Ratings. The stock has an overall grade of B, translating to a Buy in our proprietary rating system.
ACDVF has an A grade for Value and a B for Quality. It has ranked #3 among the 26 stocks within the Airlines industry.
To see the other ratings of ACDVF for Stability, Growth, Sentiment, and Momentum, click here.
What To Do Next?
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ICAGY shares were unchanged in premarket trading Monday. Year-to-date, ICAGY has gained 2.58%, versus a 7.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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