The airline industry is one of the most crucial industries to the global markets and supply chains. It did suffer quite significantly over the last 4 to 5 years mainly due to the pandemic. However, in 2024, the airline industry is projected to achieve operating profits of more than $49 billion, which is supported by strong demand and pricing power, according to a PwC report from January.
Passenger numbers are rebounding to almost pre-COVID levels, although full recovery of lost growth may take longer. However, there are still a few challenges that the industry needs to overcome, including supply chain and production quality issues, which are expected to continue impacting aircraft deliveries throughout the year.
Trends in Advancement of the Airline Industry
According to PwC, generative AI is set to change the industry by improving efficiency and customer service. Additionally, 2024 is an important year for increasing the use of Sustainable Aviation Fuel (SAF), with goals to reach 5-10% SAF by 2030. However, large investments are necessary to create the needed infrastructure.
“Like most industries of today, airlines are also implementing AI to improve the efficiency of their operations. According to an August report by CNBC, these companies are using AI for tasks like ground control, customer service, and optimizing flight routes.
North America Leading the Way
According to a KPMG report posted in January, the North American airline market has been the primary driver of global traffic growth and profitability, accounting for 56% of the IATA's industry profit forecast for 2024. The region quickly recovered from the pandemic and achieved profitability in 2022, with transatlantic travel rebounding in the summer of 2023.
While low-cost carriers (LCCs) initially benefited from early domestic recovery, premium international travel demand has surged which favors the bigger airlines. The major carriers have seen strong demand for their premium services, which are driven by both leisure and business travelers. On the other hand, LCCs like Spirit and JetBlue have faced challenges, including softer demand, higher fuel and labor costs, and capacity constraints due to engine issues.
In June, IATA increased its profit forecast for global airlines in 2024 and now expects a net profit of $30.5 billion, which is higher than both the $27.4 billion expected in 2023 and the earlier 2024 forecast of $25.7 billion.
Some major expectations for 2024 include record revenue of $996 billion and 4.96 billion passengers, but ongoing supply chain issues are limiting aircraft deliveries. Cargo revenues are also declining from their pandemic highs but remain above 2019 levels.
IATA also highlighted the need for supply chain improvements and favorable public policy to support industry profitability and investments in sustainability.
Our Methodology
To select the 10 worst airline stocks according to short sellers, we used a Finviz stock screener to identify over 20 airline stocks. Next, we narrowed our list to 10 stocks with the highest short interest but were also the most popular among elite hedge funds, as of Q2 2024. Finally, these stocks were ranked in ascending order of their short interest.
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 Boeing 737-Next Generation aircraft in flight, highlighting the efficiency of the company's fleet.
Copa Holdings, S.A. (NYSE:CPA) operates airline passenger and cargo services primarily through its subsidiaries, Copa Airlines and AeroRepública. Copa Airlines benefits from its strategic hub in Panama, which offers a broad network of flights across North, Central, and South America, as well as the Caribbean. AeroRepública runs a low-cost airline model called Wingo, that serves Colombia and several cities in the surrounding region.
Recently, the company added its first Boeing 737 MAX 8 to its fleet, bringing the total number of aircraft to 110, which includes 76 Boeing 737-Next Generation aircraft, 29 Boeing 737 MAX 9 aircraft, and one Boeing 737-800 BCF (Boeing Converted Freighter).
At a stake value of $325.405 million, 24 hedge funds held positions in Copa Holdings (NYSE:CPA) in the second quarter. As of June 30, Renaissance Technologies is the top shareholder in the company and has a position worth $82.99 million.
For the second quarter, Copa Holdings (NYSE:CPA) reported a net profit of $120.3 million, which showed strong financial performance. The operating income reached $159.5 million, with a margin of 19.5%, marking some of the best results in the company’s history.
Management attributed the success to the company's effective management of low ex-fuel unit costs and sustained demand for air travel in the region. However, it is worth noting that passenger yields fell to 12.1 cents, an 8.7% decrease from the previous year. The decline was largely due to a revision in the unredeemed ticket revenue provision for tickets sold in 2024, which also contributed to a 7.9% drop in passenger revenues per available seat mile (PRASM).
While Copa Holdings (NYSE:CPA) has seen some challenges and is among our list of the worst airline stocks according to hedge funds, analysts are bullish on it. The stock has a consensus Buy rating among 15 analysts. As of September 20, the average price target of $150 represents an upside of 63.88% from the present levels.
Overall CPA ranks 9th on our list of the worst airline stocks to buy according to short sellers. While we acknowledge the potential of CPA 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 promising and trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
