We also dive deep into trends in the commercial aviation industry, especially the impact the return of international travel to pre-pandemic levels has had on the airline industry.
The coronavirus pandemic wreaked havoc across the global airline industry. According to the International Air Transport Association (IATA), industry revenues slumped from $838 billion in 2019 to $384 billion a year later, registering a 54.1% downfall. However, the market has gradually recovered over the last few years and is on track for solid growth as international travel resumes worldwide.
A report by UN Tourism in January this year stated that international tourism was recorded in 2023 at 88% of pre-pandemic levels, and is on track to return to levels before the coronavirus struck. The IATA anticipates global airline revenue to reach $996 billion in 2024, 19% higher than in 2019 and 1.5 times higher than the pandemic low of 2020.
The global travel recovery has been led by the Middle East, the strongest tourism market in 2023, as it welcomed 22% more travelers than it did in 2019, becoming the only region to prevail over pandemic levels. Europe reached 94% of the levels in 2019, while Africa stood at 96%. Asia Pacific has been rather slow, recovering only 65% of pre-pandemic levels as of last year.
The uptick in international travel is yielding solid returns this year. As of October 23, 2024, a major airline ETF issued by U.S. Global Investors has grown by 18.44% YTD, outperforming the broader market by 4.5%. Analysts at Forbes believe airline stocks are poised for strong growth during the second half of 2024 as fuel prices dip after long periods of price hikes. Fuel accounts for between 20-30% of airlines’ total costs. Moreover, airlines in the US are cutting down on excess domestic capacity after compressed margins during the summer season. The oversupply of seats has resulted in lower fares, and airline operators are determined to correct that. The deceleration of capacity, coupled with strong travel demand, will enhance their pricing power and improve earnings.
Hedge fund sentiment on airline stocks is also encouraging. Tony Bancroft from Gabelli Funds shared his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26. He noted a significant growth in aircraft orders, resulting in major aircraft manufacturers having a 12-year backlog of orders. Bancroft cited China as the primary catalyst driving robust demand.
According to the portfolio manager, the country represented 20% of all new aircraft orders as Chinese airlines strive to cater to the growing demand for travel among the middle class at home and in neighboring India. Bancroft also highlighted the rising middle class in the United States and other parts of the world that are increasing international travel, and contributing to the strength of the commercial aviation industry.
We sampled stocks from ETFs with airline exposure and then picked the top 10 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A commercial plane flying overhead with a scenic view of the region in the background.
Number of Hedge Fund Holders: 28
SkyWest, Inc. (NASDAQ:SKYW) is the holding company for SkyWest Airlines, a regional North American air carrier that offers scheduled passenger service for flights operated under code-share agreements with United Airlines, Delta Air Lines, Alaska Airlines, or American Airlines. Besides this, the company also offers chartered flights on-demand through its SkyWest Charter division. Moreover, its leasing company, SkyWest Leasing, leases aircraft and engines to third parties, which further enhances its revenue potential.
The company generated $867 million in revenue during Q2 2024, up 8% sequentially from the first quarter, and 19% higher year-over-year, driven by high demand, the strength of its partnerships, and ongoing improvements in staffing. Net income for the quarter was posted at $76 million, representing earnings per share of $1.82, which beat analysts’ expectations of $1.73 per share.
SkyWest, Inc. remains confident about the rest of the year and its outlook for 2025. It is anticipating a 9% to 11% increase in block hours compared to 2023, up from initial expectations of 7% to 9% at the end of Q1. The revised guidance has been driven by improving pilot availability, strong demand from the company’s partners, and increasing fleet utilization. GAAP EPS is forecast to be in the north of $6.
The airline is also committed to giving back to shareholders and has repurchased 10.9 million shares for $311 million since the beginning of 2024. It is also significantly reducing its debt, fueled by solid positive free cash flow. The company’s debt came down to $2.8 billion at the end of Q2, from $3 billion as of year-end 2023. It is on track to repay over $400 million debt in 2024.
These results have led to a bullish sentiment around the stock. Street analysts have a consensus on the stock’s Buy rating. Hedge funds are also encouraged by the company’s trajectory. ClearBridge Small Cap Value Strategy stated the following regarding SkyWest, Inc. (NASDAQ:SKYW) in its Q2 2024 investor letter:
We also added a new position in SkyWest, Inc. (NASDAQ:SKYW), a regional airline operator. The company reported strong quarterly earnings as its pilot attrition declines and fleet utilization improves. We believe that SkyWest continues to find opportunities to deploy capital in a value-accretive manner, acquiring more planes under long-term contracts. We think earnings should hold up in a potential recession and perhaps even improve further if major airlines reduce capacity and more pilots become available for SkyWest.
According to Insider Monkey’s database for Q2 2024, 28 hedge funds have investments in the company, making it one of the best airline stocks to buy according to hedge funds. SW Investment Management is the most dominant stakeholder in SkyWest, among hedge funds tracked by Insider Monkey, with holdings valued at $49.24 million, as of June 30, 2024.
Overall SKYW ranks 5th on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of SKYW as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SKYW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
