Stocks to buy

3 Airline Stocks to Buy as Southwest Hits Turbulence

It’s been a roller coaster ride for airline stocks in recent weeks. Most notably, the Southwest Airlines (NYSE:LUV) debacle made investors think about other airline stocks to buy.

On Jan. 11, the FAA (Federal Aviation Administration) grounded all domestic flights after its Notice to Air Missions system failed. The glitch in the system kept planes grounded for nearly five hours. 

Airline stocks appear to have been unharmed by the groundings. The U.S. Global Jets ETF (NYSEARCA:JETS), which is the de facto proxy for airline stocks, it’s up nearly 6% since Jan. 11. Moreover, the ETF’s gotten off to a fast start in 2023. Through the first half of January, it’s gained nearly 19%.

Unless there’s another pandemic, airline stocks appear to be ready to take flight. Will JETS see the same 133% gain from May 2020 through March 2021 in 2023? That’s impossible to know. 

Anyone who thinks this is a real possibility should consider these three airline stocks to buy. Unfortunately, Southwest isn’t one of them. 

ALK Alaska Air Group $48.55
DAL Delta Air Lines $37.81
CPA Copa Holdings $91.06

Alaska Air Group (ALK)

Source: Philip Pilosian / Shutterstock.com

Alaska Air Group (NYSE:ALK) is the seventh-largest holding of JETS with a weighting of 3.02%. Given that I’m from Canada, you would think I would select Air Canada (OTCMKTS:ACDVF), the ETF’s fifth-largest position. Nope. 

I like Alaska Air and the other two listed above just fine. 

In May 2018, I recommended Alaska Air and Southwest as the two airline stocks to bet on if you felt they were likely to recover in 2019. ALK got to $72 a little over a year later. Then, unfortunately, Covid struck in early 2020, and it fell to $24 within a month of the news.

It’s been a rollercoaster ride ever since. 

I like Alaska Air today because its business is getting stronger by the quarter. In October, the company reported a pre-tax margin of 15.6%, 350 basis points higher than a year earlier and 280 basis points better than Q3 2018.

On Jan. 10, Alaska announced it would hire 3,500 new employees in 2023. Most will be based in Seattle and Portland. Hiring is always a good sign. 

Trading at 4.19-times its trailing 12-month cash flow, that’s nearly half its five-year average. It’s cheap, but its business continues to get stronger. Accordingly, I like this stock a lot, particularly below the $50 level.

Delta Air Lines (DAL)

Source: Markus Mainka / Shutterstock.com

Delta Air Lines (NYSE:DAL) is the third-largest holding of JETS, with a weighting of 10.96%.

In July 2020, I recommended investors buy DAL stock, suggesting that the company’s bold blocking of the middle seat would reward patient investors. It’s up 48% since then, but still trades well below its all-time high of $63.44 in June 2019.

Delta was the last airline to unblock the middle seat for regular economy on May 1, 2021. Alaska Air blocked the middle seat for its premium economy seating until May 31, 2021. The two were the only major U.S. airlines to block the middle seat after Jan. 10, 2021. 

That puts both companies’ management teams in good stead as the airlines continue to gather steam in 2023. 

On Jan. 13, Delta announced full-year revenue of $50.6 billion and operating income of $3.7 billion. For 2023, it expects revenue to grow 17.5% at the midpoint of its guidance to $59.5 billion. Its operating margin of 11% would result in a 77% increase in its operating profit to $6.6 billion.

Those are some very encouraging numbers. If achieved, they’ll be higher than their results in 2019. That’s saying something.  

Is $63.44 in the cards in 2023? Probably not. However, with some luck, I think we could see $50.  

Copa Holdings (CPA)

Source: Carlos Yudica/Shutterstock.com

Last on this list of airline stocks to buy is Copa Holdings (NYSE:CPA), the 37th-largest holding of JETS with a weighting of 0.50%. While it’s a tiny sliver of the ETF’s portfolio, that doesn’t mean you shouldn’t consider the Panamanian airline as an investment. 

In late December, FlightGlobal discussed how far Latin American airlines are through the recovery. It noted that IATA (International Air Transport Association) believes that in 2022, Copa will lag behind only North America in terms of passenger traffic recovery from 2019 pre-pandemic numbers.

The airline’s Panama City base of operations provides it with an advantageous location between North and South America. Copa is expected to finish the year with 97 Boeing 737s, close to the number of planes before Covid, with 34 737 Max on order.

Skift, the best online magazine about the travel industry, in my opinion, published an article in November that argued Latin America is the future of the airline industry. I couldn’t agree more. 

“Latin American aviation does have one thing on its side: Growth potential,” stated Skift contributor Edward Russell.  

“The number of flights per capita in most South American countries is well below the number in Europe or North America, two mature airline markets. That, plus continuing strong travel demand through at least the end of the year, gives industry leaders some comfort in the future.”

Copa’s risk is higher than Delta or Alaska Air, but so is the potential reward.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines  

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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