Morgan Stanley sees airline stocks propelled by demand, favourable fuel cost

Investing.com -- U.S. airline stocks are set to propel in 2025, with tailwinds like robust demand, disciplined capacity growth, and favourable fuel prices aligning to boost sector’s profitability. Morgan Stanley (NYSE:MS) expects margin expansion with revenue per available seat mile (RASM) outpacing costs per available seat mile (CASM), a dynamic that has been elusive since the pandemic.

“2025 looks set to be what 2024 should have been for US Airlines – a perfect storm of tailwinds that essentially propels the industry to make money,” Morgan Stanley analyst said, adding it was bullish on the sector, expecting a sustained recovery in international and corporate travel with strong premium demand.

Morgan Stanley initiated coverage on Southwest Airlines Company (NYSE:LUV) was rated “overweight,” with a target price of $42. The note also upgraded its price target for United Airlines Holdings Inc (NASDAQ:UAL) to $130, though the airline’s strong performance in 2024, notes that shares are up over 150%, sets a high bar for further gains.

The industry overcame challenges in 2024, including capacity constraints and supply-chain issues, Morgan Stanley said. A disciplined approach to managing supply in the second half of the year rewarded airlines with record-high stock valuations.

Morgan Stanley emphasized the importance of maintaining this discipline through 2025, projecting that capacity growth will align with pre-pandemic trends rather than the steeper recovery trajectory seen earlier.

Despite optimism, the report cautioned that airlines face higher scrutiny as valuations rise. Capacity constraints, driven by tight aircraft delivery schedules, pilot shortages, and limited maintenance capacity, are expected to persist, preventing oversupply in the near term.

Premiumisation, which has helped legacy carriers build “annuity-like” revenue streams through loyalty programs and ancillary services, is expected to remain a structural growth driver.