Jim Cramer, the host of Mad Money, recently discussed the current state of airline stocks, many of which have seen impressive gains in recent months.

“I always say that these typically make better trades than investments, they’re very different. So, after this kind of run, my gut tells me maybe to ring the register before the music stops and the light comes on. But I’m also open to the idea that maybe things, things can change. If there’s reason to believe that the airlines are suddenly less cyclical, less boom and bust, then maybe this time really is different.”

Cramer identified a few key factors driving the surge in airline stocks. Earlier this year, the airline sector was weighed down by concerns over consumer spending. While these concerns have not entirely dissipated, the Federal Reserve’s rate cuts have reduced some of the pressure. Cramer pointed out that while consumer spending has cooled from last year’s levels, travel has remained a consistent area of demand. He said that consumer sentiment has also been improving over the past few months, providing further support for this view.

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One of the most significant positive changes for the airline industry, according to Cramer, is the resurgence of business travelers post-pandemic. Business travelers tend to be less price-sensitive than leisure travelers, which provides a reliable revenue stream for airlines. He went on to say:

“I’m much more impressed by some big structural change in the industry that many people aren’t noticing. The single most important positive development for the airline over the past few months is the fact that domestic airline capacity has stopped going up as much as in previous years.”

He said that after the pandemic, airlines began ramping up their route offerings to capitalize on the surge in demand, known as the revenge travel boom. However, as Cramer explained, this expansion of capacity has historically been problematic for the industry. During boom periods, airlines add too many routes and flights, but when demand slows, they are left with excess capacity, which erodes their pricing power.

This, in turn, leads to lower profitability. In contrast, Cramer observed that since the first half of 2024, the airlines have been much more disciplined, with capacity growth slowing considerably. While capacity grew around 7% in the first half of the year, it appears that in the second half, the growth will be in the low single digits.

Cramer also pointed out that part of the reason for this newfound capacity discipline is that many low-cost carriers, which have been a major driver of supply growth in the past two decades, are now struggling.

So, can airline stocks continue their upward trajectory? Cramer believes the strength in the sector can persist as long as the airlines maintain their discipline with capacity management. However, he expressed some uncertainty about how long this trend will last. For now, though, he said that the airlines are saying the right things, with all the major players appearing to act in concert in a way Cramer has never seen before.

“In the end, the airline stocks have been white hot for months now, in part because the economy’s doing better, but mainly because the industry stopped adding new planes willy-nilly and it finally gave them pricing power. The bottom line: As long as the airlines don’t add too many new flights, I think the major carriers like United, Delta, and American, they can keep on flying.”

Our Methodology

For this article, we compiled a list of 6 stocks that were discussed by Jim Cramer during the episode of Mad Money on December 9. We listed the stocks in ascending order of their hedge fund sentiment as of the third quarter, which was taken from Insider Monkey’s database of 900 hedge funds.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Jim Cramer Talked About These 6 Airline Stocks

6. Spirit Airlines, Inc. (OTCMKTS:SAVEQ)

Number of Hedge Fund Holders: 14

Cramer highlighted Spirit Airlines, Inc.’s struggles and commented:

“So the airlines are thriving because they actually kept their word and collectively cut back on new capacity that gave them all more pricing power. But why did that happen? Well, some of it’s because the low-cost carriers are struggling. Spirit Airlines drastically reduced its number of available flights after the regulators blocked them from merging with JetBlue. Well, that’s what you expect for an airline that filed for bankruptcy last month.”

Spirit Airlines, Inc. is a budget airline offering domestic and international flights. The company has faced significant challenges, including a major setback earlier this year when a U.S. federal judge blocked its planned merger with JetBlue Airways, following a lawsuit from the Justice Department. This ruling has had a lasting impact on the airline’s trajectory. In an effort to reduce its debt, Spirit Airlines has filed for bankruptcy protection. Despite the filing, the airline intends to continue operating its flights.

Spirit stated that its flights, ticket sales, reservations, and other operations will proceed as usual, and it anticipates emerging from Chapter 11 in the first quarter of 2025. However, the company’s stock has been delisted from NYSE, marking a major shift in its financial outlook. Spirit’s restructuring process includes a financing deal worth $840 million, which is crucial to helping the airline emerge from bankruptcy. Bloomberg reported on December 13 that certain Spirit Airlines Inc. bondholders obtained special protections in a $840 million financing deal to assist with the airline’s bankruptcy exit.

These protections ensure convertible bondholders receive $140 million in exit notes and a minority stake. The restructuring is backed by two main bondholder groups. Spirit plans a swift bankruptcy exit, with bondholders exchanging $795 million in debt for equity in the reorganized company.

5. Southwest Airlines Co. (NYSE:LUV)

Number of Hedge Fund Holders: 36

Cramer highlighted that lower-cost airlines like Southwest Airlines Co. (NYSE:LUV) are currently not contributing to the oversupply of the industry.

“Southwest is also under fierce pressure from activist investors to improve profitability. These lower-cost airlines, they’ve been a major source of supply growth over the past two decades, but they’re no longer adding to the industry’s oversupply as much as they used to. Largely because they can’t afford to. Otherwise, I bet you they would. I mean, I gotta tell you, they’ve wrecked pricing over and over again, not this time.”

Southwest (NYSE:LUV) is a prominent U.S.-based airline offering scheduled air transportation services across the United States and select near-international destinations. The airline recently reached a settlement with activist hedge fund Elliott Investment Management after a prolonged dispute. As part of the resolution, the airline agreed to restructure its board, which included appointing six new directors, although Elliott did not gain control of the board as initially sought.

In exchange, Elliott withdrew its request for a special shareholder meeting where it had planned to install eight directors. Elliott was pushing Southwest to make changes, including adopting assigned seating and offering more premium options, to address its significant stock price decline over the past five years. The airline is implementing these suggestions.

On December 5, Southwest (NYSE:LUV) raised its forecast for fourth-quarter revenue per available seat mile (RASM), reflecting confidence in a rebound in domestic travel demand during the holiday season and stronger pricing. The airline revised its RASM projection to an increase of 5.5% to 7%, up from the previous forecast of 3.5% to 5.5%, citing positive revenue trends and strong forward bookings.