Delta and Other Top Airline Picks for 2022—and One Stock to Avoid

Cunningham’s top pick for 2022 was Delta Air Lines (ticker: DAL
), with Alaska Air Group ( ALK
) claiming second place. American Airlines ( AAL
) and United Airlines ( UAL
) received honorable mentions, and in the case of United the stocks also received an upgrade to Buy from Neutral.

MKM also updated its price targets for some of the stocks. Cunningham’s new target for Alaska is $69, down from $78; his target for American is $23, down from $27; and the new target for United is $54, down from $55. He maintained a $50 target for Delta.

Cunningham’s upgrade on United is based on it being the largest beneficiary of an international travel recovery in 2022, he said.

The analyst also pointed to United’s continued strength in domestic travel, and cost-saving initiatives of about $2.2 billion. The company plans to bring back 52 model 777s, which will allow the “fleet to normalize,” even with continued delays for Boeing 787 deliveries and Omicron headwinds.

United’s stock was rising 4% to $45.54 on Monday. Delta was up 3.2% to $40.33, American gained 4.5% to $18.78, and Alaska rose 4% to $54.97.

MKM said it expects U.S. airline industry capacity in 2022 to be nearly in line with 2019 as airlines rush to meet growing demand. International travel will pick up later this year, as nations continue to ease travel restrictions, he added, with corporate travel modestly improving by March or April. Going into this year, he is more optimistic that people will become better adapted at living with the pandemic as there are more tools, such as the vaccine, to mitigate negative impacts.

In the short-term, however, the rapidly transmissible Omicron variant is likely to affect bottom lines during the first quarter of 2022, Cunningham said. Over the weekend, airlines cancelled thousands of flights around the world due to Covid-19 delays.

Cunningham downgraded Southwest Airlines ( LUV
) and Spirit Airlines ( SAVE
) to Neutral from Buy, and downgraded JetBlue ( JBLU
) to Sell from Neutral. He also slashed price targets for the stocks. Southwest’s new target is $45, down from $54; Spirit’s stock price was cut to to $25 from $31; and JetBlue was reduced to $13 from $17.

MKM believes Southwest’s valuation is extended compared to the rest of the industry, seeing a strong likelihood that the airline will come in at the low end of its estimates next year.

“Southwest at their investor day stated they expect to be profitable every quarter in 2022,” Cunningham wrote. “Given the current industry dynamic with omicron (we expect off peak of Jan and early Feb to be weak) and continued cost pressures, we do not see how Southwest is profitable in 1Q22.”

Spirit’s downgrade was spurred by slightly higher costs in 2023 as the airline seeks to expand by 50% compared to its size in 2019. While many airlines are seeking to add capacity and maintain network integrity, Spirit will need to “take their foot off the capacity accelerator to maintain network integrity which will further exacerbate a cost bubble in 2022,” Cunningham wrote. This is especially risky given that Spirit is a pure leisure, budget airline with growing competition.

Cunningham sees an even harder year ahead for JetBlue, which is ramping up its flight capacity in a way that the analyst foresees will negatively impact revenue per available seat mile.

“Either management cuts their growth forecasts and adjust their costforecast much higher or they face potentially lower loads and / or yields, but regardless the outcome would be consensus estimates being cut (again).”

Spirit stock rose 2.9% to $22.48, Southwest gained 2.4% to $43.89, and JetBlue was up 2.4% to $14.68.

Write to Sabrina Escobar at [email protected]