United, Delta Remain Top Airline Picks at TD Cowen Amid Fuel Cost Headwinds

TD Cowen maintained its preference for United Airlines and Delta Air Lines as its top airline industry picks, highlighting their diversified revenue streams and strong balance sheets. The investment bank's analysis, published in an October 26 capacity tracker, comes as rising fuel costs are expected to create a significant headwind for fourth-quarter earnings across the sector.

Fuel Costs Pressure Profitability

According to TD Cowen, fourth-quarter fuel prices are likely to exceed second-quarter levels, posing a threat to earnings per share. This environment is expected to increase pressure on airlines to manage capacity and protect profitability, particularly for carriers with weaker margins and heavier debt burdens, who may need to cut unprofitable flights.

As a result, investors are closely assessing the resilience of air travel demand and the industry's pricing power. While TD Cowen noted it continues to see strong year-over-year price increases in both domestic and international markets, the higher cost of fuel remains a primary concern for sector-wide performance.

Differentiated Carrier Strength

TD Cowen's preference for United and Delta stems from their perceived ability to better withstand the challenging cost environment. The bank also holds Buy ratings for American Airlines, Southwest Airlines, and Alaska Air Group.

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However, the note cautioned that while American Airlines has a relatively diverse revenue mix, a period of prolonged higher fuel costs could potentially delay the company's efforts to reduce its debt.

Capacity Growth on the Horizon

Despite cost pressures, U.S. airline capacity is projected to continue its growth trajectory. TD Cowen provided the following year-over-year capacity growth forecasts:

• Q4 2026: Total capacity is scheduled to grow 1.8%, driven by a 3% increase in domestic capacity, partially offset by a 1.2% decline in international capacity.
• Q1 2027: Growth is expected to accelerate to 2.4%, comprising a 3% rise in domestic capacity and a 0.9% increase in international capacity.