Airline Stocks Have Been Hard Hit by Iran War, but Citi Is Betting Big on These 2 Names

With oil spiking, fears of a travel slump, and fears for the potential grounding of planes over the Iran war, airline stocks were hammered. In fact, for an idea of just how severe the airline stock pullback was, the US Global Jets ETF (JETS) dropped from about $31.33 to a low of $23.81. Worse, jet fuel costs are now up 81% since the conflict began and are now up 124% since Jan. 1. As a result, ticket prices are on the rise, with airlines passing the costs to customers.
In short, airline stocks aren’t in the clear just yet. However, analysts at Citi are still betting big on Delta Air Lines (DAL) and SkyWest (SKYW) for two key reasons. For one, according to analyst John Godyn, “The spike in fuel is extremely likely to weigh on all airline earnings in the short-term regardless of mitigating factors,” as quoted by Seeking Alpha. Two, both Delta and SkyWest are also the least sensitive to oil price shocks.
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Delta Air Lines Has Its Own Fuel Supply
Currently, Citi has a 30-day catalyst watch on Delta with a “Buy” rating. They note that Delta’s Trainer Refinery, a 185,000-barrel-per-day petroleum facility in Trainer, Pennsylvania, owned through Delta’s Monroe Energy subsidiary, covers 75% of the airline's fuel. The firm added that Delta also has the highest pre-tax profit margin in the airline industry, “which serves as a buffer to EPS sensitivity and generates high-teens percentage of revenue from its Atlantic routes—second only to United,” as also noted by Seeking Alpha.
As the Iran war drives up jet fuel costs, passenger fares, and potentially reduces demand for international travel, Delta could easily be negatively impacted by the chaos. However, firstly, the company isn’t greatly sensitive to oil price moves, and secondly, a good deal of negativity was priced in when the stock dropped from about $76.18 to a low of about $55.28 a share. Better yet, while investors wait for the eventual recovery in the DAL stock, they can collect its dividends. Most recently, Delta declared a dividend of $0.1875, which is payable on March 19 to shareholders of record as of Feb. 26.
Of the 24 analysts covering DAL stock, 21 analysts rate the stock as a “Strong Buy,” one rates it as a “Moderate Buy,” and two rate it as a “Hold.” Presently, the mean target price among analysts is $81.24, which implies 28% potential upside. The high-end target of $90 implies 42% possible growth from here.