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.

READ ALSO Jim Cramer Discussed 18 Companies That Hit $100 Billion in Market Cap in 2024 and 10 Best Jim Cramer Stocks to Buy According to Analysts

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.

4. American Airlines Group Inc. (NASDAQ:AAL)

Number of Hedge Fund Holders: 41

Talking about how American Airlines Group Inc. (NASDAQ:AAL) stock has managed to rise over the past months, Cramer said:

“Even some of the… majors have made great moves. American Airlines, turn around project… has shot up nearly 90% from its August lows.”

American Airlines (NASDAQ:AAL) operates as a major network air carrier, offering scheduled air transportation services. During its third-quarter update, management expressed confidence in the company’s performance for the holiday season. They noted strong strength in bookings for the holidays and observed similar positive trends during Thanksgiving. Management remains optimistic about the company’s outlook for the fourth quarter based on these booking patterns.

According to AAA, an estimated 119.3 million people are expected to travel 50 miles or more from home between Saturday, December 21, and Wednesday, January 1. This projection represents an increase of 3 million travelers compared to the previous year and exceeds the previous record set in 2019 by 64,000.

Additionally, American Airlines (NASDAQ:AAL) generated $2.4 billion in free cash flow through the first three quarters of the year. Looking ahead, the company expects to take delivery of 17 new aircraft in 2024, with seven of those aircraft scheduled to be delivered by the end of the year. Additionally, the company plans to grow its capacity by approximately 1% to 3% in the fourth quarter, with a full-year capacity increase expected to range between 5% and 6%, consistent with prior guidance.

3. The Boeing Company (NYSE:BA)

Number of Hedge Fund Holders: 52

Cramer mentioned that a bottleneck has emerged because of The Boeing Company’s (NYSE:BA) production pace.

“Boeing’s inability to consistently produce new planes, well, that’s created another major supply bottleneck that we didn’t see coming.”

Boeing (NYSE:BA) is a leading aerospace company and faced several challenges in the year, including supply chain disruptions and a work stoppage involving the International Association of Machinists (IAM), which impacted operational efficiency. As a result, the company experienced a significant increase in core loss per share in the third quarter, rising to $10.44 from $3.26 year-over-year.

The company also faced significant production issues, including the forced slowdown of its manufacturing processes due to a series of safety incidents at the start of the year. This was followed by a nearly two-month strike at its Washington plants, which ended in November. Despite these setbacks, the company made strides in addressing its production challenges.

On December 9, Reuters reported that Boeing (NYSE:BA) resumed production of its best-selling 737 MAX jetliner, approximately one month after the conclusion of the seven-week strike involving 33,000 factory workers. The resumption of the 737 MAX production line is critical for Boeing, as the heavily debt-laden company works towards recovery. With around 4,200 orders for the 737 MAX, the company is responding to a growing global demand for air travel.

Additionally, on December 12, the company announced plans to invest $1 billion to expand its facilities in South Carolina to increase the production of the 787 Dreamliner. It aims to ramp up production to 10 Dreamliner aircraft per month by 2026, with facility upgrades expected to be completed by early 2027.

2. United Airlines Holdings, Inc. (NASDAQ:UAL)

Number of Hedge Fund Holders: 54

Highlighting that United Airlines Holdings, Inc. (NASDAQ:UAL) stock has risen over the past month, Cramer also noted its management’s comment on capacity management.

“United is up an astounding 159%… Let’s consider the case of United Airlines, best performer. When the company reported second-quarter results in July, they noted that the capacity had grown 8% year-over-year that quarter, reflecting the industry-wide trends. But they also said that they believed that that trend was ending. United explained that the industry would be removing unprofitable capacity in the second half of the year, especially in the fourth quarter. In October, when United reported… CEO Scott Kirby… very proudly said, I’m gonna quote it, ‘The inflection we spoke about on our last call has happened and we’re seeing unprofitable capacity begin to exit the market, leading to the expected domestic yield improvement.’ The company’s chief commercial officer, Andrew Nocella then added, ‘United’s domestic capacity in 2024 was shaped with the expectation that the industry would remove unprofitable capacity in earnest in Q4. As a result, United expanded slower than most during the first three quarters of the year when capacity dynamics were less favorable. But importantly, our timing is right, tilting our growth to the quarter where the industry conditions would be the best.’ I can’t believe that these guys are saying this stuff.”

United Airlines (NASDAQ:UAL) operates as a major provider of air transportation services, offering both passenger and cargo services. According to the airline, domestic passenger revenue per available seat mile (RASM) showed a slight year-over-year improvement in both August and September, marking a significant recovery from earlier in the quarter when it had been down by 4%.

Management attributed this positive shift to the maturation of capacity added in 2022 and 2023, which helped drive the improved RASM results. Looking ahead, management expressed optimism regarding United’s performance in Latin America, citing the ongoing capacity rationalization by low-margin airlines in the region. They expect this trend to benefit the airline’s operations in the coming quarters.

Additionally, United Airlines (NASDAQ:UAL) management noted that revenue trends also improved across most geographic areas, helped by the industry’s capacity rationalization and a decline in fuel prices, which provided some relief to cost pressures.

1. Delta Air Lines, Inc. (NYSE:DAL)

Number of Hedge Fund Holders: 57

Cramer said that Delta Air Lines, Inc. (NYSE:DAL) is “best of breed” and noted that the stock has gained quite a lot in the past several months.

“We need to talk about the remarkable run in the airline stocks over the past few months… Delta Airlines… we consider the best of breed, has soared nearly 70%.”

Delta (NYSE:DAL) is a major provider of air transportation services, catering to both passengers and cargo across a wide range of domestic and international routes. During its Investor Day, the airline projected strong sales growth in 2025, anticipating a boost in revenue due to a solid economy and continued demand for premium and international travel.

The company expects revenue to grow in the mid-teens in the coming year, though it also anticipates that costs, excluding fuel, will rise. Premium products have become an increasingly important source of revenue for it. The company reported that its premium offerings, including premium seats and its loyalty program, account for 57% of its overall revenue. In comparison, main cabin seating now represents 43% of Delta’s earnings. The company has also set a target to see sales from premium seats alone surpass revenue from coach seats by 2027.

Delta (NYSE:DAL) President, Glenn Hauenstein, has previously discussed improvements in the company’s capacity management in previous statements to investors. He noted that the excess capacity observed during the summer months began to improve by August, helping to boost revenue trends as the airline entered the fall season, typically a quieter period for travel.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure. None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and investors. Please subscribe to our daily free newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.