Travel season is now in full swing. From June to August, the United States will experience a surge in travelers for the summer season. With the global economy already emerging from the COVID-19 pandemic and its restrictions, people's desire to explore new destinations and enjoy vacations has intensified. This provides an opportunity for airlines to experience a significant increase in bookings and revenues. As investors, this surge in demand presents an opportunity to trade this seasonal trend.
What is the travel season?
The height of the travel season occurs during the summer months. As a result, there's a substantial rise in both domestic and international - meaning an increased demand for air travel and in turn, higher profits.
Post pandemic traveling
With the COVID-19 pandemic temporarily restricting travel, airline revenues and share prices took a massive beating. However, as vaccines began to be adopted, travelers started to take advantage and make travel plans. Even though the recovery was choppy due to new variants disrupting normal travel patterns, demand was strong in 2022 as global travelers experienced a summer of congested airports and lost baggage.
Not only that, with companies moving their employees to "work from anywhere" or "work from home," this created year-round demand for leisure travel and helped shape a different pattern in this cyclical industry.
Investment opportunities in the airline sector
When it comes to sector themes, investors should always understand what pockets of opportunities are available and their drivers. In this “Travel Season,” investors can look at different drivers that may push this sector up even further:
Airline Stocks
Investors can look at airline stocks that are very prominent in their area of operations and those with strong market positions, efficient operations, and solid financials. These factors can help yield favorable returns in the cycle. At the very least, investors should always consider revenue growth, load factors, cost management, and fleet modernization when looking at airline stocks.
Ancillary Revenue Streams
Airlines generate revenue not only from ticket sales but also from ancillary services. These drivers include fees for baggage handling, priority boarding, seat selection, in-flight entertainment, and extra legroom. Due diligence can assess airlines' strategies to maximize ancillary revenues and identify which carriers have innovative and successful ancillary offerings.
Regional Airlines
Even though airline travel is lucrative, the travel season is when one would expect passengers to take international flights. That said, regional airlines can also present great investment opportunities. Airlines that cater to domestic routes and connect smaller cities are crucial in feeding traffic to big airline hubs. Successfully pinpointing regional airlines with strong partnerships, reliable operations, and growth potential can present an opportunity for great returns.
Now let’s look at some Buy-rated stocks that provide opportunities in this rotating theme
Alaska Air Group (ALK)
Alaska Air Group, Inc. is a company that operates Alaska and Alaska and Horizon Airlines. The company also provides aviation services through McGee Air Services. The Company operates through three segments:
- Mainline - includes scheduled air transportation on Alaska's Boeing and Airbus jet aircraft. This caters to passengers and cargo throughout the United States and in parts of Mexico, Belize, and Costa Rica.
- Regional - includes its Horizon and other third-party carriers' scheduled air transportation. This caters to their passengers across a shorter distance network within Canada and the United States under capacity purchase agreements (CPA).
- Horizon - this segment includes the capacity sold to Alaska under a CPA agreement and Mainline operations that include Boeing 737 (B737) and Airbus A320 family (A320 and A321neo) jet service that is being offered by Alaska. Horizon and SkyWest flights are also included in its regional operations.
Analyst Rating
ALK has been issued a “Strong Buy” rating by 12 analysts - with a mean target of $64.71 and a high target of $75.00, an upside of 66.30%.
Copa Holdings S.A. (CPA)
Copa Holdings, S.A. is an airline passenger and cargo service provider that has principal operations through its subsidiaries:
- Compania Panamena de Aviacion, S. A. (Copa Airlines) - operates from the Republic of Panama and provides international air transportation for passengers, cargo, and mail from its Panama City hub in the Republic of Panama.
- AeroRepublica, S. A. (Copa Colombia) - provides service within Colombia and international flights from various cities in Colombia to Venezuela, Panama, Ecuador, Cuba, Mexico, Guatemala, and Costa Rica. This subsidiary also provides domestic and international air transportation with a point-to-point route network for passengers, cargo, and mail.
Analyst Rating
9 analysts have issued Copa Holdings SA a “Strong Buy” recommendation. The mean target price for CPA is $135.70, and a high target of $152.00 represents a potential upside of 40.75%.
Delta Airlines Inc. (DAL)
Delta Air Lines, Inc. operates globally as a scheduled air transportation provider for passengers and cargo.
The Company's segments:
- Airline - managed as a single business unit that provides air transportation for passengers and cargo worldwide. This also includes a loyalty program and other ancillary airline services.
- Refinery - provides jet fuel to the airline segment from its production and through jet fuel obtained through third parties and various agreements. The refinery's production consists of jet fuel as well as non-jet fuel products. This segment also offers maintenance and engineering support for its approximately 1,250 mainline and regional aircraft fleet.
The Company has a market presence and hubs in Amsterdam, London Heathrow, Paris-Charles de Gaulle, Mexico City, and Seoul-Incheon.
Analyst Rating
Analysts rate DAL as a “Strong Buy” based on 14 Strong Holds and 1 Hold. The mean target for DAL is set to $49.62 and a high target of $70.00, representing a potential upside of 95.04%.
Final Thoughts
Travel season is one of the most common sector themes in the market as it presents investors with a lucrative opportunity to gain from the market cycle. With the market's focus on the industry, analyzing market trends and understanding consumer behavior can help identify potential investment opportunities from the surging demand for air travel. However, it is still crucial to manage risks by being well-informed on the financial health of the companies and market news that may affect the industry as a whole.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
