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US Airlines Face 'Modestly Favorable' Setup Into Third-Quarter Earnings, UBS Says

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US Airlines Face 'Modestly Favorable' Setup Into Third-Quarter Earnings, UBS Says

US airlines likely face a "modestly favorable" setup heading into the next earnings season amid robust travel demand, though resurging fuel prices could weigh on the outlook, UBS Securities said Thursday.

The brokerage sees the favorable setup for airline companies ahead as demand remains robust and near-term risk from higher fuel prices seems to have been "broadly priced in," given a recent decline in stock prices. UBS cut its near-term earnings estimates for almost all airlines it covers, citing higher fuel prices.

"We see meaningful downside to the implied (fourth-quarter earnings per share) outlooks and 2027 estimates given the forward curve for fuel currently," UBS analysts Atul Maheswari and Thomas Wadewitz said in a note to clients. "We believe the market broadly anticipates these fuel-driven cuts and is likely to focus more on who is seeing (revenue per available seat mile) momentum into (the fourth quarter)."

UBS highlighted Delta Air Lines (DAL) as its top pick into the latest print, followed by Southwest Airlines (LUV).

"Airlines have outperformed all expectations on the extent of price increases they have undertaken and the limited consumer pushback to those price increases," Maheswari and Wadewitz wrote. "We see risk-reward on the stocks as more positive than negative."

Although rising interest rates could prompt consumers to cut discretionary spending, outlays on services are likely to be less impacted than spending on goods, according to the note. The brokerage also said it sees no signs yet that travel demand is slowing down.

Crude oil prices are on track for their third consecutive monthly gains in September amid fears of prolonged supply disruptions due to the conflict in the Middle East. Airline fares surged 23% year over year in August, the US consumer price index data released earlier this month showed.

The latest spike in fuel prices "means that forward estimates need to still move lower despite the better than expected demand backdrop," the UBS analysts said Thursday. "However, demand remains very strong and should drive EPS upside as and when fuel prices recede."

"Over the long-term, we believe quality airlines are likely to structurally trade at higher multiples given newfound evidence of improved pricing power for the industry," Maheswari and Wadewitz wrote.

Price: $80.92, Change: $-0.83, Percent Change: -1.02%

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