By 
Next year is shaping up to be a “Goldilocks” year for U.S. airlines, with market conditions “just right” after the pandemic cooled air travel and 2022 saw a mismatch between lingering capacity constraints and red-hot demand.
That’s from analysts at Morgan Stanley, who reshuffled their stock preferences and chose Delta Air Lines
DAL,
+0.14%
as their top pick and upgraded United Airlines Holdings Inc.
UAL,
+2.13%
to the equivalent of buy.
“The last three years have seen extreme conditions — 2020 and2021— were ‘too cold’ due to the lingering pandemic and 2022 was ‘too hot’ with pent-up demand and inflation,” the analysts, led by Ravi Shanker, said in their note.
The analysts expect that demand for leisure travel will continue at its heightened pace next year, and business travel will join it early in the year. For international travel, they predict a return to more usual, pre-pandemic levels by mid-2023. That strength and pent-up demand are likely to offset recession pressure, they said.
For consumers, pricing might be a mixed bag. This year, when the increased demand met capacity restrictions, the result was ticket prices that were 20% to 25% higher than before the pandemic.
Mixed news for air-ticket prices
For 2023, prices are likely to come down slightly as capacity improves, but will still end up above 2019 levels, the analysts said.
Jet-fuel prices are seen moderating. Prices peaked at about $4 a gallon in mid-2022, and have since come down to about $3 a gallon. Commodity futures point to “further moderation” into a mid $2 a gallon range as compared to the previous five-year range of around $1.70 a gallon, the analysts said.
As for capacity, the analysts said they do not expect to see a “material increase” at the start of the year, but later in 2023 as more new aircraft, as well as pilots, become available.
Risks to Morgan Stanley’s Goldilocks call for U.S. airlines include the economy “meaningfully deteriorating” as well as inflation and interest rates “finally impact consumer discretionary spending,” they said.
As for upgrading United Airlines stock, the Morgan Stanley analysts said they have upgraded their rating on low stock multiples and their own bias toward legacy airlines for the next year versus low-cost or ultra-low cost carriers.
United stock is the only one among stocks of major U.S. airlines to be poised to end 2022 in the black. The shares have gained 2% this year, contrasting with losses of around 14% for the S&P 500 index.
SPX,
-1.91%
American Airlines Group Inc.
AAL,
+0.75%
stock has lost 235 and Delta stock 8%.
On that bias, the analysts also downgraded their rating on the Allegiant Travel Co.
ALGT,
-5.35%
to the equivalent of hold.
“While we continue to like (Allegiant’s) flexible and nimble business model, uncontrollable (and some controllable) factors have impacted the last few quarters, creating noise and uncertainty in the medium term,” they said.
Allegiant shares have lost nearly 60% year-to-date, leading losses among shares of low-cost and ultra-low costs U.S. air carriers, with JetBlue Airways Corp.
JBLU,
-0.13%
second, off 45%.
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