Airline Tracker: Delta Air Lines, United Airlines, and American Airlines receive strong ratings from HSBC

HSBC began coverage of 4 US airline shares on Monday, based on the general view that demand trends in 2024 are positive due to the continued recovery in business and leisure passenger numbers. The British company believes that improved traffic mix, tight capacity environment, and strong international demand should support earnings growth across the sector. However, analyst Achal Kumar and his team believe that full-service airlines are in an advantageous position over low-cost carriers, and there is a possibility that they will face headwinds due to rising cost pressure and limited opportunities for fare increases and rate increases.

“We believe there may be positive changes in the industry structure in the near future. Some airlines are considering full or quasi-integration to maintain competitiveness and rebuild balance sheets. A US court recently suspended part of the proposed deal (US - JetBlue Northeast Alliance, JetBlue-Spirit merger), arguing that it could have a negative impact on fares and competition, but we believe there could potentially be some kind of consolidation in the short term.”

HSBC began coverage for Delta Air Lines (NYSE: DAL), United Airlines (UAL), and American Airlines Group (AAL) with a “buy” rating.

Delta Air Lines (DAL) has the strongest competitiveness of all major hubs, holds almost 70% to 75% market share in the top six hubs, and is known to deploy more than 50% of its production capacity. Additionally, Delta Air Lines (DAL) is attracting attention as one of the companies with the highest penetration rate of high-value corporate traffic and premium traffic, and business traffic accounts for almost 40% to 50% of revenue. According to HSBC, Delta Air Lines (DAL) also has the strongest loyalty program.

As a source of strength for United Airlines (UAL), it can be cited that the company holds a major market share in all major hubs, and was the strongest player in the US and Asian markets before the pandemic, and this should support the company's steady recovery in line with demand for Asian airlines. The route is picked up. UAL is doing very effective product segmentation and is said to plan to upgrade its products in domestic and international markets by focusing on premium traffic. UAL's valuation is said to be attractive, and the stock is traded at 3.7 times the 12-month forward consensus EV/EBITDA compared to 6.5 times the past average.

American Airlines (AAL) received a “buy” rating from HSBC due to its well-balanced network, which includes a strong presence in the domestic market and South America. Also, UAL has just completed an aircraft renewal program and has the youngest aircraft of any major airline with an average age of 12.9 years. A healthy free cash flow is expected to help UAL eliminate balance sheet leverage over the next few years.

HSBC began reporting on Southwest Airlines (LUV) with a hold rating.