With oil spiking, fears of a travel slump, and fears for the potential grounding of planes over the Iran war, airline stocks were hammered. In fact, for an idea of just how severe the airline stock pullback was, the US Global Jets ETF (JETS) dropped from about $31.33 to a low of $23.81. Worse, jet fuel costs are now up 81% since the conflict began and are now up 124% since Jan. 1. As a result, ticket prices are on the rise, with airlines passing the costs to customers. 

In short, airline stocks aren’t in the clear just yet. However, analysts at Citi are still betting big on Delta Air Lines (DAL) and SkyWest (SKYW) for two key reasons. For one, according to analyst John Godyn, “The spike in fuel is extremely likely to weigh on all airline earnings in the short-term regardless of mitigating factors,” as quoted by Seeking Alpha. Two, both Delta and SkyWest are also the least sensitive to oil price shocks.

Delta Air Lines Has Its Own Fuel Supply

Currently, Citi has a 30-day catalyst watch on Delta with a “Buy” rating. They note that Delta’s Trainer Refinery, a 185,000-barrel-per-day petroleum facility in Trainer, Pennsylvania, owned through Delta’s Monroe Energy subsidiary, covers 75% of the airline's fuel. The firm added that Delta also has the highest pre-tax profit margin in the airline industry, “which serves as a buffer to EPS sensitivity and generates high-teens percentage of revenue from its Atlantic routes—second only to United,” as also noted by Seeking Alpha.

As the Iran war drives up jet fuel costs, passenger fares, and potentially reduces demand for international travel, Delta could easily be negatively impacted by the chaos. However, firstly, the company isn’t greatly sensitive to oil price moves, and secondly, a good deal of negativity was priced in when the stock dropped from about $76.18 to a low of about $55.28 a share. Better yet, while investors wait for the eventual recovery in the DAL stock, they can collect its dividends. Most recently, Delta declared a dividend of $0.1875, which is payable on March 19 to shareholders of record as of Feb. 26.

Of the 24 analysts covering DAL stock, 21 analysts rate the stock as a “Strong Buy,” one rates it as a “Moderate Buy,” and two rate it as a “Hold.” Presently, the mean target price among analysts is $81.24, which implies 28% potential upside. The high-end target of $90 implies 42% possible growth from here. 

SkyWest Is Also Minimally Sensitive to Shocks in Oil Prices

SkyWest also has high pre-tax margins that serve as a buffer against oil and economic shocks. It also uses Capacity Purchase Agreements for most of its fleet with major partners, such as United (UAL) and American (AAL), which protects SkyWest from volatile fuel prices. In addition, partners will reimburse the airline for fuel costs. All of which creates a stable business model. With those agreements in place, SkyWest is another one that’s not greatly impacted by rising oil prices. I'd also argue that a good deal of negativity has been priced into this stock. After slipping from about $111 a share to a low of $86.89, the stock is starting to pivot higher again. From its last traded price of $91.76, I’d like to see it retest $111.

Of the seven analysts covering SKYW stock, five analysts rate the stock as a “Strong Buy,” and two rate it as a “Hold.” Presently, the mean target price among analysts is $128.33, which implies 40% potential upside. The high-end target of $150 implies 63% possible growth.

More news from Barchart

• 1 Under-the-Radar Stock That Insiders Are Buying Up Now
• The Market About Nothing: Why Stocks Are Stuck in a Seinfeld-Style Loop and How to Play It From Here
• CoreWeave Stock Is Up 105% in a Year. Can It Soar to $180?
• Airline Stocks Have Been Hard Hit by Iran War, but Citi Is Betting Big on These 2 Names