Are Airline Stocks a Good Buy in May 2023?

Airline stocks are gaining traction, as oil prices begin to cool. Is May a good time to buy airline stocks before a cyclical upturn?

| More on:
Plane on runway, aircraft

Image source: Getty Images.

Airlines have been hit hard by the pandemic, rising oil prices, the Russia-Ukraine war, and high interest rates. After three years, have North American airlines adjusted to the post-Covid world and high fuel prices? 

Recently, Air Canada (TSX:AC) raised its 2023 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) guidance to $3.5-$4 billion (from $2-$3 billion). Investors are now wondering if May 2023 is the time to invest in airline stocks. 

The challenges for airline stocks in 2023 

Fuel cost is at the core, accounting for 30% of any airline’s expenses. Most North American airlines passed on the fuel cost to travelers, which helped some of them return to operating profits in 2022. Higher fares did not impact demand, and airline revenue rode the recovery path. 

Despite operating profit, airlines have high debt they accumulated during the pandemic. The high-interest rate and the strengthening U.S. dollar are keeping profits stressed. The worst is behind for airlines, with fuel costs beginning to ease. But there is still a challenge of a looming recession. 

High interest rates and inflation could reduce consumer demand. Until now, the airlines rode on higher revenue, but this growth could slow. If the demand slows due to the lower purchasing power of consumers, oil prices will cool, and that is what the Fed wants. When oil prices reduce, so will ticket prices, making airline travelling attractive. And that is how the extremes of supply and demand cycles will normalize. But all this could take two to three years. 

International Air Transport Association (IATA) expects North American airline’s profits to increase to US$11.4 billion in 2023, driven by strong demand and lower oil prices. 

Should you consider buying airline stocks in May 2023? 

The industry has overcome its biggest crisis, which has altered the world of airlines. Small airlines might face sustainability issues in a recession, but big airlines might survive and recover with the economy. The 2008 Financial crisis saw a two-phase growth for airlines. Similar growth is likely in 2023, with the second phase of longer-term growth to begin later this year.

You can consider investing $500 of your Tax-Free Savings Account (TFSA) contribution room in two Canadian airline stocks. 

Air Canada stock 

Air Canada has revised its earnings outlook, expecting the U.S. dollar and fuel costs to be lower in 2023. It is tapping long-haul flights and high-margin cargo services to boost profits. The improvement has begun, but this growth might slow in a recession and could see another year of net loss. But the stock might rise on improving revenue. 

Airline stocks are cyclical, and the growth cycle has started. The cyclical upturn could double or triple the share price in three to five years. There could be a few months of bearishness in the short term, but the risk of bankruptcy is averted. It means a dip will likely follow a delayed recovery. You can buy Air Canada stock while it trades below $22 and sell it when it crosses the $35 mark. 

Cargojet airlines 

Cargojet (TSX:CJT) is not immune to recession. A decline in consumer demand could pull down e-commerce volumes and reduce its revenue from cargo shipments. To reduce the impact of e-commerce seasonality, Cargojet gives its planes for Adhoc charter when not in use for cargo deliveries. The airline also offers ACMI (Aircraft, Crew, Maintenance and Insurance) at scheduled routes. ACMI has higher margins, as fuel costs, navigation, and landing fees are borne by the customer. 

Cargojet can withstand a dip in e-commerce volume during a recession thanks to the multiple uses of its aircraft. Now is a good time to buy the stock as it trades closer to its 52-week low. 

Investing tip 

May 2023 is a good time to buy the above two Canadian airline stocks while they still trade at their lows. They could see more downside if the economy enters a recession. But a buy-and-hold strategy for five to seven years could double or triple your money.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cargojet. The Motley Fool has a disclosure policy.

More on Investing

Dividend Stocks

Enbridge Stock: This Dividend Aristocrat Looks Like a Steal in 2023

Here are some key factors that make ENB a great Canadian dividend stock to buy on the dip in 2023.

Read more »

Stocks for Beginners

Invest in These Stocks to Make the Most of Your TFSA

If you are unable to find fundamentally strong stocks for your TFSA in 2023, here are two great stock picks…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

U.S. Debt Ceiling: Is It Safe to Invest Right Now?

The U.S. debt ceiling is in the headlines again. You can play it safe by investing long term in wonderful…

Read more »

Stocks for Beginners

2 TSX Stocks to Smooth Over the Market’s Bumps

Here are two of the safest TSX stocks you can buy in June 2023 without worrying about high stock market…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

1 Bank Stock I’d Buy Today (and 1 I’d Sell)

Bank earnings season is upon us, and I’d look to buy Bank of Nova Scotia (TSX:BNS) while avoiding another top…

Read more »

Credit card, online shopping, retail
Tech Stocks

Should You Buy Lightspeed Stock After Its Q4 Earnings?

Despite its volatility, I expect Lightspeed to outperform in the long run due to its healthy growth prospects and cheaper…

Read more »

oil and natural gas
Energy Stocks

These Canadian Energy Stocks Are Bargain Buys for 2023

Here are two of the best Canadian energy stocks you can buy on the dip in 2023 to hold for…

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Royal Bank Stock Pays a 4.37% Dividend Yield, But Another Stock Looks Even Better Today

Royal Bank of Canada (TSX:RY) may be the top dog on the TSX, but I prefer another dividend stock for…

Read more »