Morgan Stanley, which has downgraded a number of several luxury stocks in 2024, is placing its bets on two premium global carriers – Qantas Airways and Delta Airlines – given their currently attractive valuations.
The firm expects long-term demand for premium tickets to drive further profitability for these airlines, reducing their reliance on “lower-margin economics of economy class”.
While traditional luxury goods stocks face increased headwinds from weaker Chinese demand and shifting consumers preferences, Morgan Stanley noted that “premiumisation” represents “a new earnings paradigm” for the airline industry.
“While airlines can potentially benefit from the growing wealth of the affluent consumer, similar to luxury brands, we believe this is yet to be fully appreciated by the market,” the firm said.
Its analysis highlighted that the share of higher-priced tickets from premium, business, and first-class cabins is expected to contribute more to total revenues.
Delta’s premium ticket revenue grew approximately 8 per cent year-on-year for the nine months to the end of September this year, significantly exceeding the main cabin revenues which were slightly down over the same period.
Morgan Stanley also noted that according to Delta’s data released during the company’s recent Investor Day, its premium tickets have reached around 40 per cent of its total passenger revenues, compared to approximately 29 per cent in 2014, with further premium ticket sales expected to surpass the main cabin by 2027.
Similarly, it said, Qantas’ international revenue per available seat kilometres (RASKs) was tracking at around 40 per cent higher than pre-COVID, with the company pointing to its strength in leisure demand and “specifically premium cabins”.
“We believe this could potentially transform the economics of the aircraft and these trends are in turn, driving confidence in the earnings outlook, reflecting the changing supply and demand dynamics for the industry,” the firm said.
These changes are also reflected in the seat layouts of new aircraft orders, with higher seat allocations towards the premium cabins.
According to data, Delta announced that its A350-1000 aircraft will allocate half of its seats to premium classes, a significant increase from the pre-2010 era when only 10 per cent were designated as premium.
Valuations
Morgan Stanley believes the market has yet to fully value airlines, with Qantas and Delta expected to “break away from historic ranges”.
“Compared to luxury goods companies, airlines provide a much more attractive pricing avenue to gain exposure to the strong growth demographic and secular demand trends,” it said.
The bank noted this year consumers have continued to choose premium travel over luxury items, such as watches and handbags, leading to luxury brands posting negative sales growth for its fashion and leather goods in the US.
Morgan Stanley argued that investing in companies such as LVMH Moet Hennessy Louis Vuitton SE and Compagnie Financiere Richemont SA has historically offered exposure to the growing ultra-high-net-worth demographic, a highly desired growth theme to have in a portfolio. However, this is going to change, with premium carriers now emerging as the alternative for investors.
“We contend that airlines are now becoming an alternate way of tapping into the demand of this demographic,” the bank said.
Separately, boutique investment specialist Northcape Capital echoed this sentiment in its 2025 Australian equities outlook, published earlier this month, noting that the airline sector is undergoing “positive structural change” after many years of overcapacity and poor profitability.
“Qantas, as industry leader, is set to continue benefiting from this positive structural change,” the firm said.
