We recently compiled a list of the 10 Worst Airline Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where Allegiant Travel Company (NASDAQ:ALGT) stands against the other airline stocks.
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.
We also discussed the role of AI in the industry in our article 11 Worst Aviation Stocks to Buy According to Analysts. Here is an excerpt from the article:
“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.
American Airlines introduced its AI-powered “smart gating” system at its Dallas-Fort Worth control center. The tool automatically assigns gates to incoming flights, which cut runway taxi time by around 20%, or two minutes per flight, across five airports. The system also helps passengers, baggage, and crews make quicker connections, which improves overall efficiency.
Alaska is using AI to streamline flight paths and optimize aircraft turnaround times at gates. Its tool is described as “Waze for the skies,” and it uses AI to plan faster routes, which saves fuel and reduces delays. Additionally, the system monitors ground operations as it tracks when fuel, catering, and baggage trucks arrive and depart, which allows agents to address delays immediately.
United has implemented generative AI for customer service, especially during flight disruptions. The AI generates detailed, empathetic messages explaining delays, which has increased customer satisfaction by 4% since its rollout on 6,000 flights.”
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 busy airport terminal with travelers passing through on their leisure travels.
Allegiant Travel Company (NASDAQ:ALGT)
Short Interest as % of Shares Outstanding: 10.77%
Number of Hedge Fund Holders: 17
Allegiant Travel Company (NASDAQ:ALGT) is a major U.S. airline, headquartered in Las Vegas, Nevada. It is known for its ultra-low-cost business model. The airline focuses on serving underserved leisure markets and connects smaller and medium-sized cities to popular vacation destinations. The company uses a fee-based revenue structure, according to which it keeps base fares low while offering several add-on services such as seat selection, baggage handling, and food purchases.
Allegiant Travel’s (NASDAQ:ALGT) ancillary revenue is one of the most attractive features of its business model, which includes fees for services beyond just the ticket price. The approach has helped the airline maintain profitability while keeping base fares competitive. It also partners with hotels, car rental services, and tourist attractions and offers bundled travel packages.
On September 20, Allegiant Travel (NASDAQ:ALGT) raised it Q3 outlook based on its August performance. Chief Commercial Officer Drew Wells reported stronger-than-expected demand and unit revenue for late September, with third-quarter unit revenues showing a 5.5% year-over-year decline, an improvement from the earlier forecast of a 7.5% decline.
The company’s CFO, Robert Neal said that non-fuel unit costs for Q3 increase is expected to be 4.5%, which is 2.5% lower than expected. Fuel costs for the quarter are expected to average $2.70 per gallon, down from $2.80.
Allegiant Travel (NASDAQ:ALGT) expects its August capacity to be up around 1.8%, compared to previous forecasts of 1.3%. In August, the company updated Q3 guidance, which shows a 1.8% year-over-year rise in system available seat miles (ASMs), with scheduled service ASMs up 1.6%. The company anticipates an operating margin between -0.5% and -1.5%, and EPS excluding special charges, is projected to range between -$0.75 and -$1.25, compared to the previously forecasted range of -$1.50 to -$2.50.
However, even with a positive outlook, some analysts remain bearish on Allegiant Travel’s (NASDAQ:ALGT) stock. On September 21, TipRanks reported that Bank of America Securities analyst Andrew Didora reiterated a Sell rating on the company with a $40 price target. Despite its positive update on third-quarter guidance, including better-than-expected revenue and cost control, the analyst remains skeptical.
The analyst stated concerns over its unique route network, high expenses from new pilot agreements, and the costly Sunseeker project. Despite lower fuel costs, the company’s financial challenges and high debt levels contribute to his bearish outlook.
In Q3, 17 hedge funds had stakes worth $111.800 million in Allegiant Travel (NASDAQ:ALGT). With 945,839 shares worth $47.51 million, Diamond Hill Capital is the company’s largest shareholder as of Q2.
Overall ALGT ranks 3rd on our list of the worst airline stocks to buy according to short sellers. While we acknowledge the potential of ALGT 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.
Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.
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