What happened
The headwinds appear to be dissipating for SkyWest (SKYW -2.42%), giving the small-plane operator clear skies to gain altitude. That had the stock heading higher this week, with shares up 15%, according to data provided by S&P Global Market Intelligence, as of midday Thursday.
So what
It has been a volatile few years for commercial airlines. Their stock prices fell sharply in the early days of the pandemic as travel nearly ground to a halt, but a surge in demand in recent quarters has helped the sector to get airborne again.
SkyWest operates using a different model than most of the carriers that travelers will be more familiar with. It operates a fleet of about 500 smaller airplanes that do business under the brands of partners including United Airlines Holdings, Delta Air Lines, and Alaska Air Group. These fee-for-service deals help it better manage its income and expenses, but like other airlines, SkyWest does best when demand is strong.
Deutsche Bank analyst Michael Linenberg went bullish on SkyWest this week, upgrading the stock to a buy from a hold and assigning it a $46 price target. Linenberg said he expects "significant improvement" in SkyWest's return on invested capital over the next three years, saying the airline could meaningfully outperform the industry through 2025.
Now what
Historically, these regional airlines have been difficult to invest in because their larger partners would pit them against each other and force them to undercut each other on price. But industry consolidation has been healthy for the regionals, and SkyWest has established itself as a top operator with a large number of partners.
There are still risks to owning airline stocks: Although inflation, macroeconomic issues, and the threat of a possible recession have yet to stall demand so far, travel could take a hit if the economy takes a turn for the worse. But for long-term focused investors, SkyWest appears to be heading in the right direction.
