North American Airline Industry Analysis: Stock Picks, Postpandemic Normalization, and Other Trends

As the postpandemic air travel rebound begins to stabilize, some volatility and economic factors might still have a notable impact on airline stocks.

Uncertainty surrounding tariffs and a potential recession have led to fluctuations in airline stock valuations. We anticipate moderate growth for the airline industry in the near term, keeping an eye on how competition between low-cost and legacy carriers develops. Low-cost carriers made gains in passenger volumes over the last decade, though legacy carriers have held steady.

Morningstar’s Q2 North American Airline Industry Analysis examines the moves of major players like American Airlines AAL, which is attempting to rally after a marketing misfire in 2023. Meanwhile, we see United’s UAL market share pick up as overvalued, with other carriers more fairly valued.

Airline Traffic Normalization Is Well Within Sight

With the postpandemic air travel rebound leveling off, we’re seeing some signs of a return to prepandemic patterns. North American air travel has tapered, with growth now mirroring broader consumer trends like retail sales and gross domestic product.

US air passenger growth has slowed to match overall retail sales growth in the US, both at a less than 5% change year over year in 2025. US GDP growth flatlined in first- and second-quarter 2025, falling much faster than inflation, which hovered around a 3% change year over year. At the same time, Canada’s purchasing power has grown and outpaced the US in the first half of 2025.

Consumer sentiment dropped in early 2025, especially among affluent families making more than $100,000 per year. These and other economic factors have led to significant fluctuations in airline stocks and valuations from fourth-quarter 2024 into the second quarter of this year.

Market Volatility Has Shifted Valuations

April’s tariff news brought airlines’ fortunes into question and raised the prospect of an imminent consumer recession.

Highflyers like United and Delta DAL saw pullbacks from the fourth quarter, though both remain overvalued. Market revaluations have also created relative bargains in airlines such as Southwest LUV, American, and even Air Canada ACDVF, though none of these are undervalued according to our fair value estimates. All of the airlines in our coverage have High or Very High Uncertainty Ratings, so we expect a higher discount on the fair value before purchase.

Other stocks that may be seeing an impact from this market volatility include hoteliers, global distribution systems, online travel, and cruise lines. We cover these stocks more in depth in our Q2 2025 Travel Services Pulse.

These fluctuations create a chance to guide investors through a structured risk assessment, which will ensure their portfolios align with their ability to tolerate the volatility in this sector.

Low-Cost Carriers Are Growing to Compete With Legacy

The larger airlines like American, Delta, United, and Southwest have all seen minimal change in their passenger shares in recent years, but low-cost carriers have increased their share by five points over the last 10 years. United has taken just two points of passenger share from American over the same period.

Low-cost carriers have also expanded capacity, picking up five points of capacity share from legacy and regional airlines. However, the Big Three (Delta, United, and American) gained revenue shares while Southwest and regional airlines gave up two points of revenue shares.

Overall, global demand for air travel has rebounded since the pandemic and even more so outside of the US and Canada. Load factors show Canada is slightly behind global demand, and the US is a bit further behind that, but we are returning to prepandemic levels.

International Airline Routes Are Stable

Airline routes are also regaining balance in the postpandemic landscape. International routes generate 28% of industry traffic and operating revenue in the US and Canada.

Only Latin America and domestic markets have delivered consistent profitability since 2022. The Atlantic market is the largest, worth $45 billion, but it’s mainly unprofitable outside its peak season during the second and third quarters.

The Pacific and Latin American routes show less seasonality and greater consolidation than the Atlantic market. The Pacific route’s profitability has shown strong gains mainly because of a late 2024 spike in cargo volume and rates.

Regional route-level trends illustrate a few pockets of differentiation among the largest carriers, especially as international markets contribute 28% of industry revenue. Markets with consistent demand and lower seasonality—like Latin America for American and the Pacific for United—offer more reliable cash flow profiles, though they remain competitive.

Demand and Pricing Remain Resilient, but Costs Are Up

Despite tariff shocks in April, US passenger volume is nearing the same levels as 2024. In fact, the number of US citizens traveling outside the US is on pace to surpass 2024.

Peak season industry load factors eased to the prepandemic average of 85% in 2024, and both winter 2024 and first-quarter 2025 delivered higher troughs that also matched prepandemic conditions.

Notably, Southwest traded some load for yield while introducing a new basic fare that does not include free checked baggage, similar to its competitors. The airline was typically known for offering low fares, unassigned seats, and a free checked bags policy. Later in 2025 it will begin an assigned seating system.

American Airlines also saw a hit to revenue when it reduced incentives and rewards for corporate travel customers using global distribution systems. The move was made to encourage more direct bookings and to save on commissions. Unfortunately, it was not well-received, and many customers went to United and Delta. The airline estimates it lost $1.4 billion in revenue in 2024, but it is slowly recovering from the misstep.

Airlines are also facing steadily rising core operating costs since the pandemic, excluding fuel costs and one-time expenses. The 28% increase in industry unit costs equaled $37 billion of operating expenses in 2024. Increased unit costs have been mainly due to updated labor and maintenance contracts. On the flip side, fuel costs have been decreasing since 2022, allowing airlines some headroom.

Airlines Are Making Strategic Fleet Moves

Airline carriers see a wide range of efficiency levels, owing to their fleet age and route structure.

United is betting on the Boeing 787 to refresh its fleet as it leans into growing its long-range service, particularly in its Asian routes. Delta and American trail the US industry in fleet fuel efficiency for different reasons.

Delta operates more small-size jets than any competitor, meaning the planes fly shorter distances with less passengers. This lowers the carrier’s fuel-economy statistic. Plus, half of Delta’s fleet is more than 15 years old.

On the other hand, American’s prominence in the Latin America segment lowers its aggregate fuel-efficiency statistics, as its network has more shorter flights and fewer long-haul high-altitude cruises than Delta and United. However, American’s fleet is young. Only one-third of the fleet is more than 15 years old.

Southwest ordered specially shortened Boeing 737-700 and 737-MAX7s to suit its network. The airline is waiting on the 737-MAX7’s certification to replenish its fleet.

Alaska ALK flies an all-Boeing 737 fleet with no overlap to Hawaiian Airlines’ mix of medium- and long-haul jets. We suspect that postmerger, Hawaiian may eventually dispose of its few A320s and Boeing 717s.

Despite many of these strategic moves, none of the airlines in our coverage have an economic moat.

Our Top Picks and Predictions

As the return to normalcy continues, we predict slower annual capacity and passenger growth.

We think American’s misstep with corporate customers and United’s pickup in market share have played through valuations to an exaggerated degree. Overall, while industry tailwinds such as constrained supply and robust demand remain in place, the outlook remains rosy, but a softening of demand as supply constraints ease would not bode well for industry profitability.