Morgan Stanley Bullish On Airline Stocks, Names Southwest, Delta Top Picks For 2023

Most airline stocks have lost altitude in a difficult 2022 environment, but one Wall Street analyst said Monday that 2023 could be a big year for airlines.

Morgan Stanley analyst Ravi Shanker issued the following changes to his airline coverage:

• Reiterated Overweight rating for American Airlines Group Inc AAL, cut price target from $22 to $19.
• Downgraded Allegiant Travel Company ALGT from Overweight to Equal-Weight, cut price target from $175 to $115.
• Upgraded United Airlines Holdings Inc UAL from Equal-Weight to Overweight, reiterated $67 price target.

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The Thesis: Shanker said he is bullish on airline stocks for the third year in a row, but he prefers large legacy airlines to low-cost carriers at the moment. Shanker named Delta Air Lines Inc. DAL his top overall airline stock pick for 2023 but noted he is also bullish on United and Southwest Airlines Co LUV.

"After three years of uncertainty when the market was either too cold or too hot, 2023 could be the year when conditions are 'just right,' potentially delivering earnings well above market expectations," Shanker said.

In addition to the legacy airlines, Shanker said he remains bullish on discount airlines that have cash return stories or unique catalysts. He said Alaska Air Group, Inc. ALK is one of his top picks among low-cost carriers and he named Frontier Group Holdings Inc ULCC as his top 2023 stock pick among ultra low-cost carriers.

Benzinga's Take: The airlines dealt with extreme conditions during the pandemic in 2020 and 2021 when demand plummeted, but the pendulum swung back in the other direction in 2022 when airlines dealt with pent-up demand and skyrocketing costs. Airline bulls are hoping the industry can finally normalize in 2023 and stable, predictable airline cash flows will trigger earnings multiple expansion for the undervalued airline stocks.

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