In this article, we discuss the 10 worst airline stocks according to short sellers along with the outlook on the airline industry.
The airline industry is one of the most crucial industries to the global markets and supply chains. It did suffer quite significantly over the last 4 to 5 years mainly due to the pandemic. However, in 2024, the airline industry is projected to achieve operating profits of more than $49 billion, which is supported by strong demand and pricing power, according to a PwC report from January.
Passenger numbers are rebounding to almost pre-COVID levels, although full recovery of lost growth may take longer. However, there are still a few challenges that the industry needs to overcome, including supply chain and production quality issues, which are expected to continue impacting aircraft deliveries throughout the year.
Trends in Advancement of the Airline Industry
According to PwC, generative AI is set to change the industry by improving efficiency and customer service. Additionally, 2024 is an important year for increasing the use of Sustainable Aviation Fuel (SAF), with goals to reach 5-10% SAF by 2030. However, large investments are necessary to create the needed infrastructure.
We also discussed the role of AI in the industry in our article 11 Worst Aviation Stocks to Buy According to Analysts. Here is an excerpt from the article:
“Like most industries of today, airlines are also implementing AI to improve the efficiency of their operations. According to an August report by CNBC, these companies are using AI for tasks like ground control, customer service, and optimizing flight routes.
American Airlines introduced its AI-powered “smart gating” system at its Dallas-Fort Worth control center. The tool automatically assigns gates to incoming flights, which cut runway taxi time by around 20%, or two minutes per flight, across five airports. The system also helps passengers, baggage, and crews make quicker connections, which improves overall efficiency.
Alaska is using AI to streamline flight paths and optimize aircraft turnaround times at gates. Its tool is described as “Waze for the skies,” and it uses AI to plan faster routes, which saves fuel and reduces delays. Additionally, the system monitors ground operations as it tracks when fuel, catering, and baggage trucks arrive and depart, which allows agents to address delays immediately.
United has implemented generative AI for customer service, especially during flight disruptions. The AI generates detailed, empathetic messages explaining delays, which has increased customer satisfaction by 4% since its rollout on 6,000 flights.”
North America Leading the Way
According to a KPMG report posted in January, the North American airline market has been the primary driver of global traffic growth and profitability, accounting for 56% of the IATA’s industry profit forecast for 2024. The region quickly recovered from the pandemic and achieved profitability in 2022, with transatlantic travel rebounding in the summer of 2023.
While low-cost carriers (LCCs) initially benefited from early domestic recovery, premium international travel demand has surged which favors the bigger airlines. The major carriers have seen strong demand for their premium services, which are driven by both leisure and business travelers. On the other hand, LCCs like Spirit and JetBlue have faced challenges, including softer demand, higher fuel and labor costs, and capacity constraints due to engine issues.
In June, IATA increased its profit forecast for global airlines in 2024 and now expects a net profit of $30.5 billion, which is higher than both the $27.4 billion expected in 2023 and the earlier 2024 forecast of $25.7 billion.
Some major expectations for 2024 include record revenue of $996 billion and 4.96 billion passengers, but ongoing supply chain issues are limiting aircraft deliveries. Cargo revenues are also declining from their pandemic highs but remain above 2019 levels.
IATA also highlighted the need for supply chain improvements and favorable public policy to support industry profitability and investments in sustainability.
With that, we look at the 10 Worst Airline Stocks According to Short Sellers.
10 Worst Airline Stocks To Buy According to Short Sellers
Our Methodology
To select the 10 worst airline stocks according to short sellers, we used a Finviz stock screener to identify over 20 airline stocks. Next, we narrowed our list to 10 stocks with the highest short interest but were also the most popular among elite hedge funds, as of Q2 2024. Finally, these stocks were ranked in ascending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Worst Airline Stocks According to Short Sellers
10. Delta Air Lines, Inc. (NYSE:DAL)
Short Interest as % of Shares Outstanding: 4.76%
Number of Hedge Fund Holders: 51
Delta Air Lines, Inc. (NYSE:DAL) is a major provider of scheduled air transportation, serving both passengers and cargo across the globe. With a remarkable operational scale, the airline conducts around 4,000 daily flights to more than 280 destinations on six continents.
The airline has established significant hubs in important markets, including Atlanta, New York, Los Angeles, and London, among others. In 2023, the company successfully served over 190 million customers, which shows its extensive reach and popularity in the airline industry.
Despite its strong position, Delta Air Lines (NYSE:DAL) faced challenges in recent months due to a software update that caused a crash in Microsoft operating systems. The disruption led to extensive flight delays and cancellations, with the airline canceling over 5,000 flights between July 19 and July 25. The incident not only affected customer satisfaction but also resulted in an estimated financial loss of around $500 million, as noted by CEO Ed Bastian. It ranks 10th on our list of the worst airline stocks according to short sellers.
For the second quarter, the airline reported earnings of $2.36 per share on revenue of $16.7 billion, slightly below expectations of $2.37 per share and $15.5 billion in revenue.
Year-over-year, net income declined by 30%, but the airline generated $2.7 billion in free cash flow during the first half of the year, which was evidence of its ability to maintain liquidity and financial health amid challenges.
The company is placing an increasing emphasis on premium travelers and expects that revenue from this segment will grow faster than that from economy travel. The shift includes a focus on its “loyalty and other” revenue streams, which now account for 56% of total revenue.
Premium revenue saw a 10% increase in the quarter compared to the previous year. Loyalty revenue rose by 8%, fueled by growth in co-brand spending and a greater mix of premium credit card usage.
Moreover, the airline’s SkyMiles loyalty program and its partnership with American Express offer significant potential for future revenue growth. In Q2, Delta Air Lines (NYSE:DAL) received $1.9 billion from American Express, marking a 9% increase from the previous year. The ongoing investment in premium services and loyalty programs positions the company favorably to capture more high-value customers and diversify its revenue sources.
Oakmark Fund stated the following regarding Delta Air Lines, Inc. (NYSE:DAL) in its first quarter 2024 investor letter:
“Delta Air Lines, Inc. (NYSE:DAL) is a leading global airline. Of the big three U.S.-based airlines (Delta, United and American), we see Delta as the most competitively advantaged. We believe the company’s years of industry-leading operational performance and investments in the customer experience have established Delta as the premium brand in the industry. We also think its geographically optimal hubs, high local market share, robust loyalty program and unique corporate culture all support healthy returns on capital. Delta currently trades at 6x our estimate of normalized earnings per share. We believe this is an attractive valuation for a competitively advantaged and growing business in an out-of-favor industry.”
9. Copa Holdings, S.A. (NYSE:CPA)
Short Interest as % of Shares Outstanding: 5.42%
Number of Hedge Fund Holders: 24
Copa Holdings, S.A. (NYSE:CPA) operates airline passenger and cargo services primarily through its subsidiaries, Copa Airlines and AeroRepública. Copa Airlines benefits from its strategic hub in Panama, which offers a broad network of flights across North, Central, and South America, as well as the Caribbean. AeroRepública runs a low-cost airline model called Wingo, that serves Colombia and several cities in the surrounding region.
Recently, the company added its first Boeing 737 MAX 8 to its fleet, bringing the total number of aircraft to 110, which includes 76 Boeing 737-Next Generation aircraft, 29 Boeing 737 MAX 9 aircraft, and one Boeing 737-800 BCF (Boeing Converted Freighter).
At a stake value of $325.405 million, 24 hedge funds held positions in Copa Holdings (NYSE:CPA) in the second quarter. As of June 30, Renaissance Technologies is the top shareholder in the company and has a position worth $82.99 million.
For the second quarter, Copa Holdings (NYSE:CPA) reported a net profit of $120.3 million, which showed strong financial performance. The operating income reached $159.5 million, with a margin of 19.5%, marking some of the best results in the company’s history.
Management attributed the success to the company’s effective management of low ex-fuel unit costs and sustained demand for air travel in the region. However, it is worth noting that passenger yields fell to 12.1 cents, an 8.7% decrease from the previous year. The decline was largely due to a revision in the unredeemed ticket revenue provision for tickets sold in 2024, which also contributed to a 7.9% drop in passenger revenues per available seat mile (PRASM).
While Copa Holdings (NYSE:CPA) has seen some challenges and is among our list of the worst airline stocks according to hedge funds, analysts are bullish on it. The stock has a consensus Buy rating among 15 analysts. As of September 20, the average price target of $150 represents an upside of 63.88% from the present levels.
