Airline stocks led the travel industry on a three-month romp into December that closed out five years of pandemic gyrations. Air travel and cruise bookings rebounded above pre-Covid highs. Now, as supply and demand come into balance, airlines are reconfiguring and cruise lines are throttling up for a busy couple of years.
Some of the fastest-moving airline stocks, led by United Airlines, Allegiant and American Airlines, are now just off record highs. Even with the pullback, the airlines industry stock group is up 81% from early August.
The leisure services group, home to Norwegian Cruise Line Holdings, Royal Caribbean and Carnival, rallied 27% from mid-August to the end of November. Travel booking sites, including China's Trip.com, Travelzoo and India's MakeMyTrip, soared 57%.
As 2025 nears, many of those names have pulled back modestly from their peaks. Investors are looking into 2025 and asking what comes next. Will the increase in demand prove durable as the world heads toward a promised trade war prompted by Trump administration tariffs? And, as the stock market heads into what is likely to be a positive year of trade, can the stocks match analyst expectations for rising earnings and an ongoing rally?
Airline Stocks Confront Supply-Demand Imbalance
Airlines have always had a hard time matching capacity with demand. After a rapid buildup to meet the post-pandemic "revenge travel" surge, airlines struggled to trim capacity early this year.
All the airlines recognized there was a supply-demand imbalance, American Airlines CEO Robert Isom said in a July 5 conference call.
"We're taking swift action to make sure that we are reducing our planned capacity growth in the back half of the year," he said. But he noted "a murky environment" made it challenging to see where the industry might settle.
Smaller airlines like SkyWest reported still seeing "significant demand" for many regional routes. The company noted business-class demand outpaced capacity growth in the first half. Larger airlines rearranged their flight rosters to capture some of the regional business. Smaller players offered upscale seating to capture more business travel.
"The pressure other U.S. airlines are experiencing today is due in large part to their unprofitable flying in many domestic markets," United Airlines CEO Scott Kirby said in a July 18 earnings call. "It was always inevitable that carriers would begin to cancel this unprofitable flying, and you see that happening in earnest in the second half of August in the schedules."
Boeing's quality control issues, delivery delays and labor problems also figured into airlines' struggle to match supply to demand. But the aircraft maker is now bringing production back up to speed and mending its delivery schedule.
A scan across the earnings outlooks of the major airline stocks shows a turn from spotty, up and down performances over the past year to analyst forecasts for a year of solid earnings growth.
"I do think the supply-demand balance has found some decent equilibrium," Citi analyst Steve Trent told Investor's Business Daily. "We went into the pandemic and everything shut down, and airlines just did minimal flying because they were minimizing their daily cash burn. We went from that to having vaccines available and to travel ramping up massively, then to airlines struggling to find enough equipment and flight crews to meet all that demand."
The Airline Industry's Capacity Battle
Demand is still improving, but is starting to moderate, Trent said. Demand can cool fairly quickly, he notes, much more quickly than an airline can reduce capacity.
"It takes awhile to adjust capacity, adjust flight schedules, repurpose flight crews and crew bases and what have you," Trent said. "So some of that's been occurring post-summer."
Many airlines anticipated the moderation in demand, as well as a lull in pricing. But larger airlines like United, American and Delta Air Lines can more easily adjust their schedules than their regional or low-cost counterparts.
"Management teams had walked the market through their expectations for rapid reductions in domestic capacity," TD Cowen analyst Tom Fitzgerald wrote to IBD. "These capacity cuts began to show up in forward schedules during the month of August."
Big Airline Stocks Benefit From Strong Supply Discipline
Airlines confirmed the supply reductions at several conferences in early September. Prices began to edge higher, and fuel prices fell in what Fitzgerald called an "encouraging" combination.
On a July 11 conference call, Delta President Glen Hauenstein said airlines have "really only been in an oversupply situation for a couple of months."
"I've been doing this for 40 years, and I've never seen the industry react so quickly to an oversupply," he said.
Bernstein analyst David Vernon agreed that the industry was showing fairly strong supply discipline.
"We have a situation where Delta and United are accounting for the bulk of industry profits," he said. "The lower-cost carriers are not making money, and they're being forced to retrench and adjust their business models because of some changes in the way airlines have been marketing their fares."
As a result, Vernon said, the industry is seeing "a very good supply-demand balance."
Travel Booking Stocks See Business Ramp Up
A balance similar to that of airline stocks is helping to drive results at travel booking sites. Reservations at Expedia, Booking Holdings and Trip.com all topped analyst estimates for their recent quarters. All three noted particular strength in Europe and China.
The China travel market showed "remarkable resilience," Trip.com Chairman James Jianzhang Liang said during the Q3 earnings call, despite the country's struggling economy. Indicators for both domestic and cross-border travel were strong, he said, and showed recovery in consumer confidence.
The country's National Day holiday in early October saw passenger trips and bookings surpass pre-pandemic levels.
Booking.com reported double-digit growth in room nights booked across Asia, with major improvements in Europe. The company noted stable growth in its U.S. business. And CEO Glenn Fogel said its U.S. bookings continue to outpace the domestic accommodation industry.
Fogel expects "healthy levels of room night growth" to continue in Q4 as "travel remains resilient."
Seaport Research projected this month that Booking will sustain long-term bookings growth in the mid to high single-digits. Seaport hiked its price target on BKNG stock to $5,400 from $4,800 and maintained a buy rating on the shares.
Meanwhile, Expedia in November finally lifted its fiscal-year bookings outlook after three consecutive guides down. Expedia's Q3 earnings beat also delivered record room nights growth in online travel, which Jefferies said could suggest that recent product and marketing initiatives to reaccelerate growth are working.
In September, Jefferies projected worldwide room nights growth for online travel agencies would slow to 6.1% this year, down from 11% growth in 2023. The report forecast 4.5% growth in 2025, slowing to 3.6% growth in 2026.
"The slowdown is primarily driven by a normalization of demand trends, now that worldwide room nights have reached pre-pandemic levels," the firm wrote.
Cruise Lines Gather Strength
Out at sea, cruise lines continue to smash booking and revenue records. Looking ahead, 2025 and 2026 are already outpacing this year's booking trends.
Carnival CEO Josh Weinstein said during the September investor call that 2024 is exceeding company expectations. Nearly half of the company's 2025 inventory had already been sold, while 2026 was off to "an unprecedented start."
Forward bookings for 2025 are outpacing this year's level in terms of both price and occupancy, with record volumes for cruise sailings.
Carnival's revenue for the third quarter hit an all-time high of nearly $8 billion, surpassing last year's record level by $1 billion.
Royal Caribbean in October reported that the demand and pricing environment accelerated throughout the year, while onboard consumer spending continues to outpace 2023 levels. The strong momentum prompted Royal Caribbean to hike its guidance four times throughout the year.
An early December note from Truist analyst Patrick Scholes projected a strong outlook, based on conversations with senior travel executives and an examination of "big data" across the industry.
"While we tried to find something materially negative to make a contrarian call, the data points continue to look very encouraging and the conversations were all extremely positive," Scholes wrote.
Scholes said pricing, particularly on booked reservations, appeared set to accelerate through the first half of 2025. Bookings for the third quarter remain "extremely strong," and are ahead of historical levels by 10% to 15% going into 2025.
2025 Earnings For Carnival, Royal Caribbean, Norwegian Cruise Lines
That strength in 2025 pricing suggests "significant upside" to current consensus estimates, said Scholes, who expects industrywide pricing to increase in the high-single-digits year over year. The Wall Street consensus is 3.5% to 5% ticket pricing growth for 2025.
For the cruise lines themselves, analysts project 2025 earnings growth of 31% for Carnival, 27% for Norwegian and 23% at Royal Caribbean.
Truist expects "minimal" impact on the cruise industry from the U.S. election results. It noted a bit of a slowdown in bookings the week before the election, but the pace quickly returned to normal afterward.
Meanwhile, cruise lines should benefit from new supply limits through at least 2028.
"The industry is coming up on a unique period of historically low supply growth, quite possibly the 'Golden Era' for cruise companies," Scholes wrote.
He noted that pre-pandemic cruise demand was strong, but the annual supply growth of around 6% limited companies' ability to grow yields above inflation levels. But for 2026 to 2028, industrywide supply growth is projected at around 2% per year, leaving more room for yield growth.
Discount Airline Stocks: Spirit Airlines, Frontier
Vernon said the battle between bundled and unbundled pricing explains why smaller airlines have seen more limited success.
For years, growth among low- and ultra-low-cost carriers like Spirit Airlines and Frontier Group outpaced legacy airlines because of their unbundled pricing strategies. They set low nominal ticket costs, but charge customers additional fees for everything from seat selection and carry-on bags to a glass of water.
"You pay for everything, but (the basic fare) was cheap, and that attracted a lot of capacity," Vernon said. "The legacy airlines couldn't compete with that because they had higher costs and they hadn't figured out how to market a similar product."
But airlines like United and Delta have since found ways to unbundle their own pricing. They now charge for extras ranging from seat assignments to checked bags to in-flight entertainment.
"By doing so, they've limited the low-cost airliners' ability to disrupt their markets and take their market share," Vernon said.
Low-Cost Airlines Test Premium Services
Low-cost carriers including Frontier, Southwest Airlines and Spirit have all introduced some form of premium seating and other perks. The coming year will test whether such strategies might work.
But premium services take these airline stocks away from their low-cost origins and what fueled their growth over the past few decades.
"Discount airlines are in the wrong verticals," Trent noted. They lack international premium, domestic premium or co-branded card-type revenues.
Aircraft are more expensive, leasing is more expensive and pilot salaries are much higher than they used to be, Trent says.
"So if you're the guy that traditionally offers the lowest fare, you're not in that greatest spot," he said. "Now they're saying, 'If you want to pay a little more, you can,' to a customer base that typically doesn't like that kind of stuff. So it's going to be a hard sell."
Outlook For Small Airline Stocks
Spirit Airlines filed for Chapter 11 bankruptcy in November. The pandemic travel stoppage and its failed attempt to sell itself to JetBlue were among the fatal blows.
Analysts agree that larger carriers stand to benefit as Spirit pulls back from major hub markets and targets what Fitzgerald calls value-seeker cities. That could create some competition for the likes of Allegiant.
Meanwhile, Vernon expects supply constraints will continue until lower-margin airlines shore up their finances and economics start improving.
The outlooks for smaller domestic and regional carriers are highly mixed.
Southwest Airlines is seen turning from EPS declines to accelerating growth in December. The same is true for Allegiant Travel and Sun Country Airlines. Estimates pick up for JetBlue Airways after the first quarter.
Triple-digit earnings growth at SkyWest is seen slowing as the company runs up against difficult year-ago comparisons. Ongoing declines are expected to continue for Frontier.
Trent at Citi noted that major air carriers have a much more favorable outlook, while discount carriers may have more work to do to balance prices and reduce costs.
Still, Fitzgerald says airlines are optimistic and airline stocks look good heading into 2025. Supply is rebalancing in line with demand and consumers still have spending money, and they are choosing to spend that money on vacations. There appear to be rising opportunities in managed corporate travel demand. And fuel prices are manageable, he notes.
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The Bigger Picture For Big Airline Stocks
The 2025 earnings outlooks for United Airlines, Delta and American show results turning from earnings declines or back-and-forth quarters to solid growth across the coming year. FactSet projects 21% earnings growth for United and Delta, and a 37% jump for American.
Analysts' 12-month price targets for United currently run between 125 and 140 — up between 37% and 53% over where shares closed Wednesday. At 76 to 100, Delta has a wider spread, a gain of 29% to 70%. American's targets range from 17 to 24 — pointing to gains from 3% to 46%.
American Airlines and Southwest lifted their outlooks for Q4 on Dec. 5, noting strong pricing, revenue and booking trends.
Looking forward, Fitzgerald said management comments on earnings calls in October reinforced the outlook that capacity cuts are helping to firm up pricing heading into the new year
"Most airlines will be slowing or cutting growth in 2025," Fitzgerald said, "and premium demand remains strong."
From the consumer side, a rise in consumer spending in November underscores that the U.S. economy continues to purr, according to economist Ed Yardeni, president of Yardeni Research. Rising real incomes and the positive wealth effect are allowing consumers to spend, rather than save, more of their incomes. That's especially true for Baby Boomers sitting on their $80 trillion in net worth, according to Yardeni's Dec. 17 research note.
"Over the past three years, we advised betting on the consumers to keep the economy growing," Yardeni wrote. "We are sticking with that recommendation for 2025."
You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison
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