The bull-case on airlines seems to be building

Investing.com -- Wolfe Research said in a note Friday that this week’s 15% jump in its Airline Index, driven by “improved CPI fare data and news of a potential Spirit bankruptcy,” is creating a set-up that “feels a lot like 2H last year.”

The firm pointed to a “positive supply-demand inflection” as a key driver.

After four consecutive months where domestic capacity growth outpaced TSA throughput, Wolfe said the spread “tightened dramatically” in July, with capacity up 1.6% and TSA traffic rising 1.1% year over year.

In August so far, TSA throughput is up 3.6% while domestic capacity is down 0.2%, and Wolfe expects the gap to widen in September when capacity is forecast to fall 0.9%.

Spot jet fuel prices are also down more than 10% since mid-July, creating “growing upside potential to 3Q guides.”

The “big news” is the possibility of another Spirit bankruptcy. Wolfe noted that Spirit, which exited Chapter 11 in March, posted “-18% operating margins” and burned $250 million in cash in the second quarter.

With Spirit still accounting for 4% of domestic capacity, a liquidation could be a “major catalyst for 2026 pricing.” Before its November 2024 bankruptcy, Wolfe’s Airline Index surged 59% in three months, far outpacing the S&P 500’s 6% rise.

Looking ahead, Wolfe said AAL and UAL offer the most valuation leverage in its upside scenario, while DAL and UAL are “best positioned with industry-leading margins but lower-end valuations.”

However, it cautioned that “airlines have already set a high bar” for fourth-quarter guidance, and valuations are higher than a year ago.

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