MW Investing in the red-hot airline sector? You may want to avoid these stocks.

By Claudia Assis

Low- and ultra-low-cost airlines are seeing core customers traveling less often, if they travel at all

A Spirit airlines jet preparing for takeoff at the Newark airport.

Many Americans may be squeezing in their last air travel of the summer, and they will find slightly cheaper prices for domestic flights and slightly higher-priced tickets for international flights. Investors who added U.S. airline stocks to their holdings are seeing another divide in their portfolios.

Wall Street is broadly positive about the industry, but "legacy," full-service airlines, particularly Delta Air Lines Inc. $(DAL)$ and United Airlines Holdings Inc. $(UAL)$, are often top choices for investors and analysts. Several budget airlines are mired in problems, including the likely bankruptcy or restructuring of one of their best-known names.

The sector has seen "a material step up" in investor interest over the past year, as more people became aware of a post-pandemic divergence between full-service and discount airlines, said Tom Fitzgerald, an analyst at TD Cowen.

"We are most constructive on the full-service carriers," specifically United and Delta as well as Alaska Air Group Inc. $(ALK)$ and American Airlines Group Inc. $(AAL)$, Fitzgerald said. "United is our top pick. We are more cautious on the domestic-oriented leisure carriers" except for Sun Country Airlines Holdings Inc. (SNCY).

Larger airlines are doing well, and have shown good financial performance even amid macroeconomic concerns.

Southwest Airlines Co. $(LUV)$ is going through changes, not always popular with its customers, but responding to pressure to improve its profit. JetBlue Airways Corp.'s $(JBLU)$ loose partnership with United should improve that company's outlook.

Budget airlines, however, "are definitely feeling the financial heat," said Henry Harteveldt, a travel-industry analyst at Atmosphere Research Group.

For budget airlines such as Spirit Airlines' parent Spirit Aviation Holdings Inc. (FLYY) and Frontier Group Holdings Inc. $(ULCC)$, the "big challenge" is that their "core customers are traveling less often, if they are traveling at all," he said.

Budget airlines' low fares appeal to travelers with more limited income, and those travelers are feeling the rising costs everywhere and thus may have less disposable income for air travel.

The budget airlines also face increasing competition from the larger carriers, which have added their own highly restricted, stripped-down "basic economy" fares that are the core proposition of low-cost and ultra-low-cost carriers, Harteveldt said.

Often, legacy airlines will offer more convenient schedules, perks such as loyalty programs and sometimes more comfort than a budget airline alongside their basic-economy fares. "You may not have much room in coach, but at least the seat goes back," Harteveldt said.

Some budget airlines are doing "reasonably well," Harteveldt said, citing privately held Avelo and Breeze as well as Sun Country. They "are avoiding direct, head-to-head competition with larger carriers," he said.

Either by flying exclusively to leisure destinations, like Sun Country, or basing operations at smaller airports and trying to fly where others do not, as Avelo and Breeze do.

Savanthi Syth, an analyst with Raymond James, also puts Allegiant Travel Co.'s $(ALGT)$ Allegiant Air in that column, noting that the airline uses some of the same strategies to avoid direct competition with bigger carriers.

In contrast, Spirit has a large base in Florida airports, and one of Frontier's major hubs is the Denver airport, where competition from the legacy carriers is fiercer.

Spirit, which emerged from bankruptcy in March, is reportedly bringing in a financial adviser and consulting firms as it tries to navigate a cash squeeze that could lead to more restructuring. The company has been under criticism for not doing enough to shore up its balance sheet, Syth said.

The U.S. Global JETS ETF JETS has gained about 16% in the past three months, which compares with an advance of around 10% for the S&P 500 index SPX over that time. The outliers on both sides are United Airlines' stock, up 36% over the same period, and Spirit's parent company, which is down 80%.

Legacy airlines offer travel as an 'experience'

With the rise of "experiences" in air travel, as companies compete for fewer customers, legacy airlines also have an edge, Syth said.

"There's definitely an emotional aspect of air travel," and some people may be stretching their wallets to go for extra legroom or other premium offers.

At the same time, "there's absolutely demand for an ultra-low-cost product, but the issue is price. ... You can't offer the same fare as you did in 2019," Syth said.

Rising costs are a problem that both airline styles face, she said. Fuel prices have been relatively stable this year, but labor and airport-operations expenses are on the rise.

The industry remains "highly cyclical, sensitive to fuel costs and dependent on capacity management," all of which makes it less attractive to investors at the moment, said Francis Labourin, a portfolio manager and financial adviser at Richardson Wealth.

Metrics highlight differing pricing power across airline types, Labourin said. The average passenger revenue yield, or revenue earned per mile flown, is 16.6 cents for U.S. carriers, 20 cents for legacy airlines, 17 cents for regional airlines and 11.4 cents for low-cost carriers.

"This illustrates the variability in pricing power and revenue generation across the sector," Labourin said.

"The airline industry is inherently volatile. Airlines must make significant investments in aircraft and infrastructure, while fuel prices, albeit more stable this year, economic cycles and demand for premium travel remain unpredictable," he said.

His company favors legacy airlines over low-cost carriers. The larger airlines also enjoy diversified income streams, he said.

"If passenger operations were the sole source of revenue, airlines like Delta, United and American Airlines would have posted negative operating profits in 2024," Labourin said. Their actual profits of about $14 billion combined came largely from non-passenger sources, particularly cargo, he said.

Moreover, their loyalty programs generate steady income, which are a win-win: Airlines get that predictable, stable revenue stream from program partners such as banks and credit-card companies, cardholders earn and redeem miles for rewards, and banks benefit from increased customer engagement, Labourin said.

Airlines are likely to see slower growth and potentially tighter margins in the coming months, particularly if capacity expands faster than demand, he said.

"We are concerned about overcapacity" in the fourth quarter. "Focus will likely shift toward cost control and yield management rather than revenue growth."

The low-cost carriers will feel demand softening more acutely, especially on domestic and short-haul leisure routes as summer travel wanes, he said. Legacy carriers are better insulated due to premium cabins, business travel and international routes.

-Claudia Assis

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

August 29, 2025 06:00 ET (10:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.