Airlines Bull Case Builds Amid Supply-Demand Shift and Spirit Bankruptcy Fears

Wolfe Research notes a positive supply-demand inflection in the airline industry, with domestic capacity growth outpacing TSA throughput narrowing dramatically in July and TSA throughput rising 3.6% in August. Spot jet fuel prices have also decreased, creating upside potential for 3Q guides. The potential liquidation of Spirit Airlines, accounting for 4% of domestic capacity, could be a major catalyst for 2026 pricing, similar to its impact in 2024. Wolfe Research recommends AAL and UAL for valuation leverage and DAL and UAL for industry-leading margins.

Wolfe Research has identified a positive supply-demand inflection in the airline industry, with domestic capacity growth outpacing TSA throughput narrowing dramatically in July and TSA throughput rising 3.6% in August. This trend is driven by improved CPI fare data and news of a potential Spirit Airlines bankruptcy [1].

The firm noted that after four consecutive months where domestic capacity growth outpaced TSA throughput, the spread tightened dramatically in July, with capacity up 1.6% and TSA traffic rising 1.1% year over year. In August, TSA throughput is up 3.6% while domestic capacity is down 0.2%, and Wolfe expects the gap to widen in September when capacity is forecast to fall 0.9% [1].

Spot jet fuel prices, which are down more than 10% since mid-July, have created "growing upside potential to 3Q guides" [1]. The "big news" is the possibility of another Spirit Airlines bankruptcy. Spirit, which exited Chapter 11 in March, posted -18% operating margins and burned $250 million in cash in the second quarter. With Spirit still accounting for 4% of domestic capacity, a liquidation could be a "major catalyst for 2026 pricing" [1].

Before its November 2024 bankruptcy, Wolfe's Airline Index surged 59% in three months, far outpacing the S&P 500's 6% rise [1]. Looking ahead, Wolfe Research recommends American Airlines (AAL) and United Airlines (UAL) for valuation leverage and Delta Air Lines (DAL) and United Airlines (UAL) for industry-leading margins but lower-end valuations [1].

However, the firm cautioned that "airlines have already set a high bar" for fourth-quarter guidance, and valuations are higher than a year ago [1].

References:
[1] https://au.investing.com/news/stock-market-news/the-bullcase-on-airlines-seems-to-be-building-3982577