After a year punctuated with disruptions to consumer discretionary spending and over capacity in the discounted space, the airline industry is heading into 2026 on much more constructive footing with debt positions improving and the Spirit Aviation (FLYYQ) bankruptcy expected to remove much of the low fare saturation.
Wells Fargo is launching coverage of the industry with an Equal Weight rating on most carriers, with a preference towards Delta Air Lines (DAL) and United Airlines Holdings (UAL) in respect of their high margin premium offerings.
Analyst Christian Wetherbee singles out three key themes that should make the mainline carriers sustainable businesses through the current economic cycle.
First, industry rationalization aids profitability. The Spirit (FLYYQ) bankruptcy will result in “material capacity exiting the market,” while JetBlue (JBLU) is also expected to shrink its fleet to preserve profitability, all of which will firm up economics for the competitive main cabin segment.
Second, cabin and product differentiation is a key competitive advantage given the higher price points and margins, primarily for Delta (DAL) and United (UAL) with American Airlines Group (AAL) closing the gap, and Southwest Airlines (LUV) playing catch up.
And finally, loyalty programs and affiliated credit cards have “materially changed the economics of the airline industry,” Wetherbee says, given the high margins and cash flow stability they provide that can sustain a carrier through lean times.
The combination of these factors coupled with larger competitive moats at the premium carriers and solid performance expected for each of the major carriers (United, Delta, American, and Southwest) will likely lead to margin expansion.
Of the four, Wetherbee taps United (UAL) as his top pick, expected to narrow its performance gap with Delta (DAL) and, giving United (UAL) an Overweight rating.
“After industry challenges in 2025, 2026 appears set up for strong network carriers like United to get stronger,” he writes, citing United’s (UAL) exposure to the more lucrative long-haul and international routes, its high-margin loyalty program, and premium cabin expansion.
“While macro uncertainty and cost pressures remain, fleet investments and rationalizing industry capacity improve [United’s] margin profile and underpin our positive view, offsetting potential union cost headwinds,” Wetherbee states.
Delta Air Lines (DAL) also earns an Overweight rating at Wells Fargo on the carrier’s premium offering, and its loyalty program, which is viewed as the most valuable asset in commercial aviation.
“We believe Delta is well positioned to outperform peers given its strong premium product offering, robust loyalty program, and disciplined capacity management, while its lower financial leverage and solid free cash flow outlook provides a favorable risk/reward profile,” Wetherbee writes.
Wetherbee is neutral on American Airlines and Southwest Airlines, rating both as Equal Weight as they play catch-up in the premium segment to United (UAL) and Delta (DAL).
American’s (AAL) co-branded deal with Citibank (C) and launch of the AAdvantage Globe credit card should boost high-margin mileage sales next year, while its 20% boost in premium seating should help narrow the revenue gap with rivals.
“American is creating a more durable airline, but elevated financial leverage leaves us on the sidelines despite our favorable industry outlook,” Wetherbee says.
Southwest Airlines (LUV) is undergoing meaningful transformation designed to lean into the higher margin premium market with initiatives that are expected to drive $4B in gross EBIT growth.
And with 30% of domestic capacity losing money, capacity rationalization is expected to accelerate in 2026 (i.e. Spirit and Frontier) which could provide a “bigger than average tailwind given Southwest’s exposure.”
Southwest’s (LUV) partnership with Chase and its loyalty program are central to the company’s strategy. Wetherbee estimates Southwest’s loyalty value at ~$18B, which is near the company’s entire enterprise value and most of its projected 2025 EBITDA.
“Improving core earnings would nicely complement loyalty strength and likely aid valuation.”
United (UAL), American (AAL), and Delta (DAL) are all trading modestly higher on Thursday, with Southwest (LUV) fractionally lower for second day after setting a 3 ½ year high on Tuesday.