Why The Airline Stock Rebound Could Continue

Airline stocks have been on a wild ride in the past month as the Russian invasion of Ukraine has pushed crude oil prices to their highest level in 13 years.

Top airline stocks plummeted in the opening days of March as investors feared the negative impact of surging fuel prices could have on airlines' margins. However, airline stocks are taking off once again this week, and Bank of America analyst Andrew Didora said Friday that airline stocks may still have more altitude to gain.

Strong Pricing Environment: Didora said airline stocks have rebounded as oil prices pulled back from nearly $130 per barrel to around $105/bbl on Friday. At the same time, airline management commentary suggests the pricing environment remains strong.

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"The biggest surprise to us in recent airline commentary was that demand was so strong that they feel confident in the ability to pass through the majority of the fuel increases," Didora said.

In fact, he noted that his 2022 and 2023 EBITDAR estimates for most airline stocks have barely changed since the end of January.

As a group, airline stocks hit a trough on March 7 that represented a 26% average decline from Feb. 18 levels. Since then, the group has rebounded by an average of 23%.

Didora said he expects the catch-up trade in airline stocks to continue in the coming weeks as pricing power remains strong. In the longer-term, he said a continued COVID-19 pandemic recovery could drive airline stocks back to valuations on the high end of their historical ranges.

Didora said leisure air travel demand remains strong, while corporate travel demand is starting to recover. Meanwhile, domestic capacity is down 2.6% from 2019 levels, which is contributing to the favorable pricing environment.

How To Play It: Bank of America has the following ratings and price targets for the "big four" U.S. airline stocks:

• Delta Air Lines, Inc. (NYSE: DAL), Buy rating, $47 target.
• Southwest Airlines Co (NYSE: LUV), Buy rating, $55 target.
• American Airlines Group Inc (NASDAQ: AAL), Underperform rating, $8 target.
• United Airlines Holdings Inc (NASDAQ: UAL), Underperform rating, $40 target.

Benzinga's Take: If the airlines have been as successful at managing soaring fuel costs as their recent commentary suggests, the first-quarter earnings season could serve as a bullish catalyst for the stocks in the near term. However, the longer-term fate of airline stocks still hinges on if and when leisure and corporate travel demand returns to pre-pandemic levels.