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After three years of uncertainty, Morgan Stanley analysts think 2023 could be a “Goldilocks” year for airline stocks with conditions not too cold or too hot, but “just right.”
“The last three years have seen extreme conditions – 2020 and 2021 were “too cold” due to the lingering pandemic and 2022 was “too hot” with pent-up demand and inflation,” they commented. “Similarly, while leisure demand and pricing are arguably “too hot”, corporate/international are still running cold. On the cost side, capacity constraints, general inflation, and jet fuel pricing have also been running “too hot” or “too cold”. However, we expect more normalized, “just right” conditions in 2023, stabilizing at a level more favorable to earnings than the market is pricing in.” On average, the firm is 43% above the consensus for 2023 and 18% above the consensus for 2024.
The firm’s order of stock preference is changing with legacy carriers moving to the top of the list. As such, Delta Air Lines (NYSE:DAL)) is their Top Pick, and United Airlines (NASDAQ:UAL) is upgraded to Overweight (number 3 on their list), while American Airlines (NASDAQ:AAL) (number 7) remains Equal Weight. The analysts also like legacy carriers with idiosyncratic and cash return stories like Southwest Airlines (NYSE:LUV), which is number 2 on their list, and Alaska Air Group (NYSE:ALK), which is number 4.
The analysts highlight five market conditions in 2023 that make it a Goldilocks year: demand, pricing, CASMxF, jet fuel, and capacity.
On the demand side, the analyst sees continued leisure demand and normalizing corporate travel. Meanwhile, Available Seat Miles (ASMs) should be +15% year-over-year.
On pricing, they expect the pricing environment will cool slightly sequentially as capacity incrementally returns. However, the return of corporate and international will be a mix tailwind to yield in 2023. In all, they expect Total Revenue per seat mile (TRASM) to be up mid-single digits across the industry.
Further, the firm expects industry CASMxF to be flat to down in the low-single digits year-over-year in 2023, they model jet fuel to be flat versus current levels and expect capacity to be up low-single digits in 1st-half of 2023, and mid-single digits in the 2nd-half of 2023 versus 2022.
In addition to the firm’s upgrade of UAL, Allegiant Travel (NASDAQ:ALGT) was downgraded to Equal-weight with a $115 price target.
