Southwest and American Downgraded, United Upgraded. The Airline Sector Is Hitting Turbulence.

Southwest Airlines stock has fallen close to 3% so far in 2023.

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It’s been a turbulent earnings season for U.S. airlines and it’s led to a reassessment of the sector’s fortunes.

Most notable are the signs of a domestic demand slowdown flagged by all major carriers heading into the second half of the year.

However, Redburn analyst James Goodall sees domestic airlines continuing to face pressure over the coming years, not just months, preferring carriers more exposed to the international market. With that in mind, he downgraded Southwest Airlines (ticker: LUV) to Sell from Neutral, and American Airlines (AAL) to Neutral from Buy in a note Monday.

American is one of the three U.S. airlines most exposed to international travel but Goodall noted it has the “greatest exposure to the more competitive domestic market.”

Goodall upgraded United Airlines (UAL) to Buy from Neutral, given its strong international presence, and maintained a Buy rating on Delta Air Lines (DAL).

Earnings season accentuated the underperformance of domestic-focused U.S. airlines against their more internationally active peers. The bumper comparable period of 2022 is one factor, and so is the boom in international travel demand at the expense of domestic journeys. 

While those things are both short-term issues, Goodall said growing domestic capacity will result in “margin pressure well into 2024 as the industry struggles to offset structural cost inflation.” He expects domestic capacity growth of around 9% year-over-year in the next two quarters, meaning continued pricing pressure on domestic routes.

“International, however, should perform more strongly thanks to a rationalized global fleet,” he added.

The divide between domestic and international exposure is reflected in the stock market.

United and Delta, two of the three carriers with the most overseas flights, are up more than 35% so far in 2023. The third, American, is up 25%, as of Friday’s close.

Shares of the major domestic players have struggled in comparison. Southwest Airlines is down 2.8% since the beginning of the year, Spirit Airlines (SAVE) is down 17%, Frontier Group (ULCC) has fallen 21%, while JetBlue Airways (JBLU) is up 3.1%.

Spirit’s CEO Ted Christie offered a crumb of comfort for domestic carriers last week, noting that he expects demand to shift back towards domestic travel after the summer ends and children go back to school. 

“This should mean a more normal pricing and demand environment for the peak holiday travel periods in the fourth quarter,” he said in a statement.

Write to Callum Keown at

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