Airlines Update Guidance, Shares Head For Different Destinations

Key Points

• Airlines are forecasting weakness in Q1, leading to strength later in the year. 
• United Airlines and Southwest Airlines are rated a Buy, JetBlue Airways, and Spirit Airlines a Hold. 
• All have double-digit upside potential for investors, but there are risks. 

Several airlines, from United Airlines NYSE: UAL to Spirit Airlines NYSE: SAVE, have come out with updated guidance that points to headwinds in Q1. The news has the stock prices moving in different directions today, but the takeaway is clear. Headwinds are present in Q1, but demand remains higher, and tighter-than-expected capacity will support fare prices. This has the entire airline industry set up for profitability starting in Q2 for most and by the 2nd half for the rest.

What this means for investors is a potential bottom in the share prices, and that can be seen on charts across the industry. 

United Airlines Forecasts Mixed Q1 

United Airlines released its update before the rest, putting pressure on the group. This company is expecting a Q1 net loss on revenue growth of 50% which is not what investors want to hear. The caveat for bears is that FY 2023 earnings are still expected from $10 to $12, significantly above the Marketbeat.com consensus estimate of $8.60.

The analyst rate this stock a Moderate Buy, which has held firm over the last year with a price target 15% above the current action. With share prices heading lower on the Q1 outlook, this gap may widen before it begins to decrease. One of the catalysts for share prices will be margin. United cited higher fuel costs as hurting margins, and oil prices are near the lowest in over a year. 

Spirit Airlines Guides for Profits In Q2 

Spirit Airlines shares increased when the company echoed United’s forecast for a gloomy Q1. Higher costs and tighter capacity were cited here as well, suggesting a trend in the industry that is echoed again by JetBlue NASDAQ: JBLU and Southwest. The good news is that Spirit is also echoing the forecast for profitability and says it expects profits as soon as Q2. Analysts covering this stock have pegged it at a Hold and have shown little change over the past year, but the price target is far more attractive. The analysts see this stock trading about 60% above its current levels, and that price target has been steady in a tight range for the last year. 

Headwinds facing this stock include higher fuel costs but also unexpected downtime for its aircraft. The company is guiding for improvement during the year, which should bring it to full capacity by the end of the fiscal period. 

CEO Ted Christie commented. “Demand remains strong and, despite higher fuel prices, we are confident we will be profitable in the second, third, and fourth quarters of 2023 and profitable for the full year 2023.”

Southwest; Net Loss In Q1, Strong Profit For Year 

Southwest NYSE: LUV is feeling similar pressures in Q1 and is forecasting a loss. Like the others, it is also guiding for robust profits for the year driven by high demand for seat miles. While fuel costs are cutting into the bottom line, reduced capacity due to a reduction in expected shipments has altered the outlook so that revenue and earnings growth will be “healthy”  for the year. Analysts view this stock as a Moderate Buy with a potential 52% upside, and JetBlue is guiding for the same. Its update calls for the same Q1 earnings weakness but includes an increase in the revenue outlook and profits for the year. Analysts rate JetBlue a Hold with a target of 50% above the recent action. 

Shares of JBLU are leading airline stocks, but the market is not out of the storm yet. Resistance is capping gains across the complex and may keep the stocks moving sideways for the next quarter. The outlook is robust, but there is significant risk in the economy. If the outlook should change, these stocks may not just remain range bound; they may even fall to new lows.