US airline stocks could require stronger earnings expectations to sustain recent gains, according to UBS, which wrote that investor focus is likely to shift back toward company fundamentals as geopolitical concerns ease.
The airline sector has rallied in recent days, with the U.S. Global Investors (NASDAQ:GROW) Jets ETF (JETS) gaining 12% over the past three trading sessions amid optimism surrounding a potential resolution to the Iran conflict and the possible reopening of the Strait of Hormuz.
However, UBS wrote that airline shares retreated from their intraday highs during the latest session, suggesting the group could enter a period of consolidation in the near term.
The firm wrote that volatility tied to macroeconomic and geopolitical headlines should normalize, placing greater emphasis on second-quarter earnings results and company outlooks.
UBS wrote that upward earnings revisions will likely be needed to drive the next leg higher for airline stocks, noting that valuation expansion has already contributed significantly to recent gains.
Based on 2027 consensus estimates, UBS noted that Delta Air Lines Inc (NYSE:DAL) trades at roughly 10.5 times earnings, Southwest Airlines Co (NYSE:LUV) at 10 times, United Airlines Holdings Inc (NASDAQ:UAL, XETRA:UAL1) at 8.5 times, American Airlines Group Inc (NASDAQ:AAL, XETRA:A1G) at 7 times, Air Canada (TSX:AC.B) at 10.5 times, and Alaska Air Group (NYSE:ALK) at 8 times. The firm characterized most of those valuations as broadly reasonable to fully valued, while identifying United and Alaska as carriers that could still see additional valuation upside.
The analysts also highlighted potential upside to industry revenue expectations. UBS wrote that consensus second-half revenue per available seat mile (RASM) forecasts for the three largest US carriers imply a slowdown in demand later this year. However, its industry checks and discussions with companies have not yet indicated a meaningful deterioration in demand trends.
That dynamic could create room for higher RASM estimates and earnings revisions, particularly if lower fuel costs are accompanied by stable demand.
Among major carriers, UBS wrote that United Airlines appears best positioned to benefit from both earnings growth and potential valuation expansion. The firm estimated that United's stock could gain an additional 12% if its valuation premium relative to Delta narrows toward historical averages.
Currently, Delta trades at a price-to-earnings premium of more than two turns compared with United. UBS wrote that the gap reflects Delta's refinery-related benefits during periods of elevated fuel prices as well as investor concerns about potential merger-and-acquisition activity involving United.
Recent declines in jet fuel prices could help narrow that valuation gap. Jet fuel prices have fallen approximately 13% over the past three trading sessions and about 40% from April highs, according to UBS.
The firm also wrote that investors have become more comfortable with the view that United is unlikely to pursue a highly leveraged airline acquisition following recent company comments.
Historically, UBS wrote that Delta has rarely maintained a valuation premium of more than two earnings turns over United for an extended period, except during 2014 and 2015 when profitability differences between the two carriers were substantially larger than they are today.
Regarding fuel-price sensitivity, UBS identified Alaska Air and American Airlines as the carriers with the greatest earnings leverage to lower fuel costs. The brokerage estimated that a $0.10 decline in fuel prices would increase 2027 earnings per share by approximately 13% for Alaska Air and 16% for American.
For other large US airlines, UBS wrote that the same fuel-price decline would boost earnings per share by about 4.5% for Delta and roughly 6% for both United and Southwest.
While lower fuel costs could support earnings across the industry, UBS wrote that investors are unlikely to award higher valuation multiples for earnings gains driven solely by cheaper fuel, making sustained revenue strength an important factor for future stock performance.