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Watch these airlines in 2023, says Raymond James

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The airline industry enters 2023 amid ongoing concerns about the impact of fuel prices and hiring challenges in the industry.

In an airline-industry outlook report, Raymond James analyst Savanthi Syth says that the analyst firm expects to see demand contract in the first half of 2023 without a meaningful pullback in fuel prices and with elevated cost pressures from networks still recovering from the effects of the COVID-19 pandemic. Airlines in the U.S. are also facing significant wage inflation, although most carriers in Raymond James’ coverage are still generating earnings, and some are generating free cash flow, according to Syth.  

“While we recognize that it is hard for stocks to work ahead of potential negative news, we would recommend building positions on pullbacks, particularly across our current Strong Buy-rated top picks,” she said, citing Delta Air Lines Inc.
Southwest Airlines Co.
Copa Holdings S.A.
and Ryanair Holdings PLC

Now read: Delta Air Lines stock jumps on raised guidance, as carrier cites ‘robust’ demand for air travel

Delta Air Lines raised its earnings guidance earlier this month, providing a boost to a number of airline stocks. The carrier said it is executing on its three-year recovery plan, with year-one results ahead of expectations. Delta also highlighted robust demand for air travel as the industry recovers from the widespread disruption caused by the pandemic.

The carrier’s stock has fallen 15.7% this year, compared with the S&P 500’s
decline of 20.1% and the U.S. Global Jets ETF’s
fall of 18.4%.

At its investor day earlier this month, Southwest Airlines promised to return its route network to prepandemic levels by the end of 2023 and cited leisure- and business-travel booking trends that bode well for next year. As expected, the carrier reinstated its dividend.

Also read: After too little, too much, there are ‘Goldilocks’ conditions for air travel in 2023

Southwest Airlines’ stock is down 14.9% this year.

For Copa, Syth pointed to the company’s unit cost compared with its robust prepandemic balance sheet and its advantaged hub as creating “a formidable defensive moat.” The Panamanian holding company, which consists of Copa Airlines and low-cost carrier Wingo, has a hub at Panama’s Tocumen International Airport that connects cities in South America to cities in Central America, North America and the Caribbean.

“Relative to global airline peers, Copa is one of the first airlines to start returning cash to shareholders, currently through buybacks,” Syth added, noting that Raymond James also expects to see a more meaningful dividend from Copa in 2023.

Now read: Southwest sees ‘strong’ bookings next year, vows to restore prepandemic route network

Copa’s stock has fallen 0.1% in 2022.

Europe’s largest budget airline, Ryanair, is also well positioned for 2023, according to Raymond James, which points to the company’s cost position and orders for Boeing Co.’s
737 MAX aircraft. “We believe Ryanair is set to maintain an improved relative cost position vs. pre-pandemic, supported by the opportunistic MAX order book, attractively priced lease extensions, and volume-based airport agreements,” Syth wrote. “Coupled with a strong balance sheet (second only to Southwest in our coverage universe, albeit with only minimal shareholder dilution in contrast to Southwest), we believe Ryanair is well positioned to take advantage of further strengthening or possible shocks.”

Ryanair’s stock is down 25.2% in 2022.

Related: Mesa Air to wind down contract with American Airlines, expand relationship with United Airlines

Underlining the challenges facing the airline industry, Mesa Air Group Inc.

on Monday announced plans to wind down its contract with American Airlines Group Inc. 
and expand its relationship with United Airlines Holdings Inc.
In a statement, Mesa said that the restructuring was driven primarily by higher pilot wages and block-hour utilization penalties, which are the result of an ongoing industry-wide pilot shortage.


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