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3 Stocks Worth a Look From the Promising Airline Industry
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Stocks in the Zacks Airline industry are being well served by a buoyant scenario backed by air-travel demand. Air-travel demand made a stronger-than-expected recovery as people are again booking flights, thereby boosting passenger revenues, which account for the bulk of most airlines’ top lines. Airline players like Southwest Airlines (LUV - Free Report) , Delta Air Lines (DAL - Free Report) and United Airlines (UAL - Free Report) are likely to benefit from robust demand for air travel.
However, high fuel costs are limiting bottom-line growth. Moreover, the labor crunch that is currently being faced by the airline industry is another woe.
About the IndustryAbout the Industry
The Zacks Airline industry includes players engaged in transporting passengers and cargo to various destinations globally. Most operators maintain a fleet of multiple mainline jets in addition to several regional planes. Operations are aided by their regional airline subsidiaries and third-party regional carriers. Additionally, industry players utilize their respective cargo divisions to offer a wide range of freight and mail services. The players invest substantially to upgrade technology. The industry, apart from comprising legacy carriers, includes low-cost players. The well-being of companies in this group is linked to the health of the overall economy. For example, the aviation space was one of the worst pandemic-hit corners, with passenger revenues taking a severe beating. However, air-travel demand is rosy now.The focus on boosting cargo revenues is an added positive.
Key Themes Governing the Airline Industry
IATA’s Bullish Forecast: Following the removal of coronavirus-induced restrictions, pent-up demand is driving traffic for the airlines. Despite inflationary pressures and supply-chain woes, there is a wave of optimism surrounding air-travel demand. The buoyant scenario with respect to air-travel demand is expected to improve further in 2023. As a result, airlines are expected to return to profitability next year. Per the International Air Transport Association (IATA), net profits for airlines across the globe are likely to be $4.7 billion in 2023. The top line next year is anticipated to be $779 billion compared with the current-year estimate of $727 billion.
With people again taking to the skies, the greatest driver of top-line improvement is passenger revenues. Per IATA, passenger revenues for the next year are anticipated to be $522 billion (85.5% of 2019 [pre-coronavirus] levels). The 2023 projection is higher than the current-year estimate of $438 billion, despite economic uncertainties.
Bottom Line Suffers Due to Oil Price Increase: Even though oil price declined from its multi-year highs due to recession fears, it remains high. Notably, oil prices increased 5.7% in the first nine months of 2022, induced by the Russia-Ukraine war. Per IATA’s December forecast, the current-year fuel bill for the industry is projected at $222 billion, higher than the forecast of $192 billion made in June.
Focus on Cargo Revenues: An Added Positive: The focus of airlines on boosting cargo revenues bodes well for top-line growth, especially in the current scenario where passenger revenues are rebounding strongly from the pandemic lows. Per IATA’s forecast, cargo revenues are expected to be $201.4 billion. That is an improvement in 2022, which is way above the 2019 actual of $100.8 billion. Cargo revenues in 2023 are expected to be $149.4 billion, which is lower than the current-year projection but still $48.6 billion higher than the 2019 actuals.
Staffing Crunch a Bane: The airline industry in the United States is being plagued by tensions on the labor front. With airlines trimming their labor force substantially during the peak of the pandemic, the industry is grappling with a staff crunch as demand bounces back. Due to labor scarcity, many U.S. airlines trimmed their capacity, which in turn, is likely to drain profitability. Reduced capacity is pushing up non-fuel unit costs. IATA expects total costs in 2023 to increase 5.3% to 5.3% to $776 billion. The increase is likely to be mainly due to labor, skill and capacity shortages.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Airline industry is a 29-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #84, which places it in the top 34% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to retain in your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Underperforms Sector but Outperforms S&P 500
The Zacks Transportation - Airline industry has outperformed the Zacks S&P 500 composite while underperforming broader Transportation sector over the past year.
The industry has declined 15.4% over this period compared with the S&P 500’s depreciation of 17.2% and the broader sector’s decrease of 12.6%.
One-Year Price Performance
The Valuation Picture
The Price/Sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.37X compared with the S&P 500’s 3.31X. It is also below the sector’s forward-12-month P/S of 1.56X.
Over the past five years, the industry has traded as high as 1.01X, as low as 0.32X and at the median of 0.68X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Transportation -Airline Stocks to Keep Tabs on
United Airlines has a market capitalization of $12.56 billion, presently. On the back of upbeat air-travel demand, UAL was profitable in the third quarter of 2022. The third quarter was the second consecutive profitable quarter at UAL since the onset of the pandemic. Management stated that air-travel demand and pricing are still strong. These factors should boost fourth-quarter results.
Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved 7.6% north at UAL. United Airlines carries a Zacks Rank of 2 (Buy), currently.
The gradual improvement in air-travel demand in the United States is a huge boon for Southwest Airlines, based in Dallas, and currently having a market cap of $22.14 billion.
Driven by the continued strength witnessed with respect to passenger yield, LUV expects fourth-quarter 2022 operating revenues to increase in the 13-17% band from the fourth-quarter 2019 actuals. Fleet-modernization efforts of LUV are encouraging as well. Following the lifting of restrictions under the CARES Act, which prohibited airlines from paying dividends till Sep 30, 2022, Southwest Airlines’ management reinstated its quarterly dividend of 18 cents per share. With the carrier returning to profitability in March 2022 and expecting to be profitable for full-year 2022 as well, the decision was hugely expected. The dividend will be paid on Jan 31, 2023 to its shareholders of record at the close of business on Jan 10.
Southwest Airlines’ earnings outshined the Zacks Consensus Estimate in each of the last four quarters. The average beat is 54.7%. Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved 3.1% north at LUV. Currently, LUV carries a Zacks Rank #3 (Hold).
Price and Consensus: LUV
Delta has a market capitalization of $21.23 billion, presently. DAL, based in Atlanta, GA, is being bolstered by the uptick in demand for air travel (particularly for leisure). Driven by upbeat air-travel demand, Delta expects fourth-quarter 2022 operating margin to be 11%, i.e. at the top of the previously guided 9-11% range. DAL now expects adjusted earnings per share in the $1.35-$1.40 range (the earlier outlook was in the range of $1-$1.25). The Zacks Consensus Estimate is currently pegged at $1.20. Total revenues are now likely to increase in the 7-8% range from fourth-quarter 2019 actuals (the earlier outlook was for an increase in the 5-9% range).
Delta’s earnings outshined the Zacks Consensus Estimate in two of the last four quarters (missing the mark in the remaining ones). The average beat is 7.9%. DAL carries a Zacks Rank #3, currently.
Price and Consensus: DAL
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3 Stocks Worth a Look From the Promising Airline Industry
Stocks in the Zacks Airline industry are being well served by a buoyant scenario backed by air-travel demand. Air-travel demand made a stronger-than-expected recovery as people are again booking flights, thereby boosting passenger revenues, which account for the bulk of most airlines’ top lines. Airline players like Southwest Airlines (LUV - Free Report) , Delta Air Lines (DAL - Free Report) and United Airlines (UAL - Free Report) are likely to benefit from robust demand for air travel.
However, high fuel costs are limiting bottom-line growth. Moreover, the labor crunch that is currently being faced by the airline industry is another woe.
About the IndustryAbout the Industry
The Zacks Airline industry includes players engaged in transporting passengers and cargo to various destinations globally. Most operators maintain a fleet of multiple mainline jets in addition to several regional planes. Operations are aided by their regional airline subsidiaries and third-party regional carriers. Additionally, industry players utilize their respective cargo divisions to offer a wide range of freight and mail services. The players invest substantially to upgrade technology. The industry, apart from comprising legacy carriers, includes low-cost players. The well-being of companies in this group is linked to the health of the overall economy. For example, the aviation space was one of the worst pandemic-hit corners, with passenger revenues taking a severe beating. However, air-travel demand is rosy now.The focus on boosting cargo revenues is an added positive.
Key Themes Governing the Airline Industry
IATA’s Bullish Forecast: Following the removal of coronavirus-induced restrictions, pent-up demand is driving traffic for the airlines. Despite inflationary pressures and supply-chain woes, there is a wave of optimism surrounding air-travel demand. The buoyant scenario with respect to air-travel demand is expected to improve further in 2023. As a result, airlines are expected to return to profitability next year. Per the International Air Transport Association (IATA), net profits for airlines across the globe are likely to be $4.7 billion in 2023. The top line next year is anticipated to be $779 billion compared with the current-year estimate of $727 billion.
With people again taking to the skies, the greatest driver of top-line improvement is passenger revenues. Per IATA, passenger revenues for the next year are anticipated to be $522 billion (85.5% of 2019 [pre-coronavirus] levels). The 2023 projection is higher than the current-year estimate of $438 billion, despite economic uncertainties.
Bottom Line Suffers Due to Oil Price Increase: Even though oil price declined from its multi-year highs due to recession fears, it remains high. Notably, oil prices increased 5.7% in the first nine months of 2022, induced by the Russia-Ukraine war. Per IATA’s December forecast, the current-year fuel bill for the industry is projected at $222 billion, higher than the forecast of $192 billion made in June.
Focus on Cargo Revenues: An Added Positive: The focus of airlines on boosting cargo revenues bodes well for top-line growth, especially in the current scenario where passenger revenues are rebounding strongly from the pandemic lows. Per IATA’s forecast, cargo revenues are expected to be $201.4 billion. That is an improvement in 2022, which is way above the 2019 actual of $100.8 billion. Cargo revenues in 2023 are expected to be $149.4 billion, which is lower than the current-year projection but still $48.6 billion higher than the 2019 actuals.
Staffing Crunch a Bane: The airline industry in the United States is being plagued by tensions on the labor front. With airlines trimming their labor force substantially during the peak of the pandemic, the industry is grappling with a staff crunch as demand bounces back. Due to labor scarcity, many U.S. airlines trimmed their capacity, which in turn, is likely to drain profitability. Reduced capacity is pushing up non-fuel unit costs. IATA expects total costs in 2023 to increase 5.3% to 5.3% to $776 billion. The increase is likely to be mainly due to labor, skill and capacity shortages.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Airline industry is a 29-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #84, which places it in the top 34% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to retain in your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Underperforms Sector but Outperforms S&P 500
The Zacks Transportation - Airline industry has outperformed the Zacks S&P 500 composite while underperforming broader Transportation sector over the past year.
The industry has declined 15.4% over this period compared with the S&P 500’s depreciation of 17.2% and the broader sector’s decrease of 12.6%.
One-Year Price Performance
The Valuation Picture
The Price/Sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.37X compared with the S&P 500’s 3.31X. It is also below the sector’s forward-12-month P/S of 1.56X.
Over the past five years, the industry has traded as high as 1.01X, as low as 0.32X and at the median of 0.68X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Transportation -Airline Stocks to Keep Tabs on
United Airlines has a market capitalization of $12.56 billion, presently. On the back of upbeat air-travel demand, UAL was profitable in the third quarter of 2022. The third quarter was the second consecutive profitable quarter at UAL since the onset of the pandemic. Management stated that air-travel demand and pricing are still strong. These factors should boost fourth-quarter results.
Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved 7.6% north at UAL. United Airlines carries a Zacks Rank of 2 (Buy), currently.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Price and Consensus: UAL
The gradual improvement in air-travel demand in the United States is a huge boon for Southwest Airlines, based in Dallas, and currently having a market cap of $22.14 billion.
Driven by the continued strength witnessed with respect to passenger yield, LUV expects fourth-quarter 2022 operating revenues to increase in the 13-17% band from the fourth-quarter 2019 actuals. Fleet-modernization efforts of LUV are encouraging as well. Following the lifting of restrictions under the CARES Act, which prohibited airlines from paying dividends till Sep 30, 2022, Southwest Airlines’ management reinstated its quarterly dividend of 18 cents per share. With the carrier returning to profitability in March 2022 and expecting to be profitable for full-year 2022 as well, the decision was hugely expected. The dividend will be paid on Jan 31, 2023 to its shareholders of record at the close of business on Jan 10.
Southwest Airlines’ earnings outshined the Zacks Consensus Estimate in each of the last four quarters. The average beat is 54.7%. Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved 3.1% north at LUV. Currently, LUV carries a Zacks Rank #3 (Hold).
Price and Consensus: LUV
Delta has a market capitalization of $21.23 billion, presently. DAL, based in Atlanta, GA, is being bolstered by the uptick in demand for air travel (particularly for leisure). Driven by upbeat air-travel demand, Delta expects fourth-quarter 2022 operating margin to be 11%, i.e. at the top of the previously guided 9-11% range. DAL now expects adjusted earnings per share in the $1.35-$1.40 range (the earlier outlook was in the range of $1-$1.25). The Zacks Consensus Estimate is currently pegged at $1.20. Total revenues are now likely to increase in the 7-8% range from fourth-quarter 2019 actuals (the earlier outlook was for an increase in the 5-9% range).
Delta’s earnings outshined the Zacks Consensus Estimate in two of the last four quarters (missing the mark in the remaining ones). The average beat is 7.9%. DAL carries a Zacks Rank #3, currently.
Price and Consensus: DAL