Airlines may struggle to keep pace with demand: Analyst

The Federal Aviation Administration (FAA) is investigating after an engine cover fell off a Southwest Airlines (LUV) Boeing (BA) 737 Max jet during takeoff. TD Cowen Senior Research Analyst Helane Becker joins Yahoo Finance Live to discuss her outlook on the airline sector amid this incident.

Considering the large number of flights that take off daily without incident, Becker states that the Southwest incident would not cause her to change her short-term outlook on Southwest's stock.

Nonetheless, Becker expresses broader concerns about the airline sector's ability to keep up with growing demand. She cites three key factors holding the industry back: increased oversight, delivery and production delays, and costs rising faster than revenues, impacting profit margins.

Despite these challenges, Becker names Delta (DAL) and United (UAL) as good buying opportunities in the airline sector, as demand is expected to recover for the summer months.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video transcript

- The airline industry is facing mounting scrutiny following a new 737 incident that occurred Sunday when an engine cover came off during takeoff. Southwest is reviewing all of its Boeing aircrafts, but has declined to say when that specific plane's engine was last checked.

Let's discuss with our next guest here. We have Helane Becker, TD Cowen Senior Research Analyst. Thank you so much, Helane for being here. I want to talk about your call on LUV, the ticker for Southwest, because you'd been famously bullish on this name.

And we talked about it previously even after kind of the holiday flights fiasco. But then last fall, you changed it to a hold from a buy. Could this latest news from Southwest potentially push you into a sell rating on the name?

HELANE BECKER: Well, you never know, right? Depending on how things go. But right now, we're comfortable with the hold rating. This is one incident. But to your point, it follows the series of incidents not just at Southwest, but at other airlines involving Boeing aircraft.

But when you think about it in the whole scheme of things, how many flights there are per day and how mostly safe they are and how few incidences we have, I don't think this would cause me to change anything in the short term.

- Helane, how are you evaluating the risk here just ahead with what's to come from Boeing when you talk about leadership changes, when you talk about increased regulation, what exactly that could mean going forward not just for Southwest, but more broadly speaking for the airline sector? How are you evaluating that?

HELANE BECKER: So for the airlines, our concern is that the industry won't be able to grow to handle the demand because of probably three things. One is increased oversight. Second is aircraft delivery delays that continue and have continued for the past four years.

And then the third concern that we have is just that costs continue to grow faster than revenues are growing. And that's a problem from a margin perspective. And it's a problem because airlines may not have enough money to reinvest in the business. And of course, you want them to continue to do that both aircraft and technology.

- So from an investor perspective, Helane, which airlines would you say are the most battle ground-- like safest is the easiest way to say it, protected from all of the headwinds that the aerospace industry has been experiencing as of late?

HELANE BECKER: Well, the airline industry is very safe. So I don't want to give anybody the wrong impression that it's not or that we're concerned that it's not safe. We're very comfortable with it. But I will say that for 2024, Delta is our best idea, followed by Copa Airlines, which is Panamanian-based. And then United is another stock we like that we have a buy on. And then we have a couple of other buys on smaller airlines.

So, I mean, look, it's going to be a pretty good year. It may not be as good financially for the industry as 2022 was. But second half should be better than first half. We still have some maintenance cost headwinds that the industry is dealing with.

American and United specifically have flight attendant contracts that are in the process of being negotiated. And we know that everybody wants to get those contracts done. Southwest flight attendants are currently voting on a second tentative agreement. So they'd like to get that done as well.

And so when we think about '24, we think we're going to have a good summer. There's still a lot of demand for air travel. At some point, people will start to run out of money or have taken all their bucket list trips and maybe slow down. Four is the new three. Maybe people have to be back in the office five days a week, four days a week. So traveling every week may be increasingly difficult.

But, I mean, look, the summer's coming. And most trips are being booked now for the summer. They're booked between mid-March and mid-May. And there seems to still be a lot of demand for especially international travel.