HSBC analysts initiated coverage of US airline stocks in a note Monday, noting that the continued recovery in corporate travel, stronger international demand, tighter capacity and pandemic-driven behavioral changes support its positive view of the sector.
"Cost pressures may not fade in the near term but profitability is set to improve; capex cycle is manageable, and the industry could see some consolidation," said the firm, which prefer flagship carriers over low cost airlines.
"The demand trend for US airlines in 2024 seems positive, driven by a continued recovery in business and leisure traffic, although the yield outlook lacks full visibility," they added. "We argue that a better traffic mix (i.e., continued recovery in high-paying corporate traffic), a tight capacity environment, cost pressure and strong international demand should support better yields."
The bank initiated coverage of Delta Air Lines (NYSE:DAL), United Airlines (UAL), and American Airlines (NASDAQ:AAL) with Buy ratings and Southwest Airlines (NYSE:LUV) with a Hold rating. Delta is HSBC's preferred stock.
HSBC also explained that they believe there could be some positive changes to industry structure in the near term, with some airlines considering full or quasi-consolidation in an effort to stay competitive and rebuild their balance sheets.