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Best Airline Stocks to Buy Amid a Rocky Recovery

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24.09.2021

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Airline stocks, like the rest of the travel industry these days, can't seem to catch a break.

After surviving the initial wave of COVID-19 and seeing travelers tentatively taking to the skies again, the Delta variant came along. But there's a silver lining: This time around, the impact doesn't seem as dire.

While travelers' fear over the Delta variant "may continue to drive a choppy recovery," says Raymond James analyst Savanthi Syth, the risks are seen as abating "particularly due to increasing vaccine penetration," albeit with regional differences. Helping things is the recent full FDA approval of the COVID vaccine co-developed by Pfizer (PFE) and BioNTech (BNTX).

Travel trends are getting brighter: Flight bookings and yield trends for the second half of the year and first quarter of 2022 are "tracking fairly positive," says Susquehanna analyst Christopher Stathoulopoulos. This suggests that traveler confidence "has not meaningfully eroded" despite the resurgence of COVID cases, he adds.

Tellingly, airlines also are signaling via their spending that they're less fearful. In the second quarter, the industry shifted from cash conservation to investing "precious capital" for the future as the pandemic waned, especially in the U.S., according to Peter McNally, global sector lead for industrials, materials and energy at research firm Third Bridge Group.

Read on as we take a closer look at how nine airline stocks look amid this rocky road to recovery. Not all carriers are created equal; the best airline stocks are flying on far sturdier wings than their peers. We'll look to identify the strongest candidates.

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The largest airline in the world, American Airlines (AAL, $20.52) was in the midst of paying back debt when the pandemic derailed its deleveraging plans. At the end of 2020, the carrier had $41 billion in debt, which was higher than its competitors, after years of capital expenditures and share buybacks, according to Fitch Ratings.

But its financials, although not out of the woods, began improving. In June, Fitch raised its outlook for the carrier to Stable from Negative to reflect its improved finances, passenger traffic rebound and a potential lift for the industry as more people get vaccinated.

Currently, American is taking steps to get its house in order by reducing debt and spending. It is accelerating debt repayments, with a plan to pay down $15 billion by the end of 2025, according to Raymond James analyst Savanthi Syth. However, that also means liquidity will fall from $21 billion at the end of the second quarter to $10 billion to $12 billion next year, she says. Syth has a Market Perform rating on the stock, which is equivalent to a Hold.

AAL is tightening its belt on the capital expenditures front as well, lowering spending to $2.6 billion a year for 2022 and 2023 – far below Syth's forecasts for Delta Air Lines (DAL) and United Airlines (UAL).

The carrier's moves come in light of its forecast for a third-quarter loss, which "is not encouraging," Syth notes. "This is in contrast to legacy peers guiding to profitability despite a less favorable geographic mix, resulting in a slower revenue recovery vs. American."

One bit of good news: In July, AAL's revenue came in higher than expected. And while August numbers were weaker than anticipated due to the Delta variant, the company's "book business for the holidays continues to be very strong," Vasu Raja, American's chief revenue officer, said at Cowen & Co.'s 14th Annual Global Transportation & Sustainable Mobility Conference earlier this month.

As far as airline stocks go, most analysts are lukewarm toward this one. Argus Research also has a Hold rating on AAL, citing the impact from the grounding of the 737 MAX aircraft, Delta variant headwinds and high debt levels.

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Among the three legacy airline stocks, United Airlines (UAL, $45.68) is the most internationally focused, with nearly 40% of its 2019 revenue coming from travelers going abroad, according to Morningstar analyst Burkett Huey.

However, as international travel wilted during the pandemic, one saving grace for United has been its practice of tightly managing costs, which helped it get through a sharp drop in business last year. "We think that consistently being the lowest-unit-cost legacy carrier since 2016 is evidence of strong management," Huey writes in a recent report.

UBS analyst Myles Walton has a Buy........

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