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Industry Outlook

Have Airline Stocks Run Out of Steam?

Unfortunately, this looks to be the case, going by controversies that have hit the not-so-long-ago high-flying sector over the past few months. In May, the industry was rocked by capacity and pricing fears that caused a loss of approximately $10 billion in market value in one single day.

The massive sell-off was triggered by Southwest Airlines’ (LUV - Analyst Report) statement that it intends to increase its capacity in the range of 7% to 8% in 2015 as opposed to the earlier projection of a 7% increase. Investors were clearly concerned that airline capacity growth at a rate higher than the U.S. GDP would lead to an oversupplied market. Later however, in response to the investor reservations, the carrier scaled back its capacity growth plans to 7%.

Another major event that sent airline stocks crashing was the news of a probe by the Department of Justice (DOJ), on the possibility of unlawful coordination by some carriers to limit the availability of seats, with the objective of keeping airfares high. American Airlines Group (AAL - Analyst Report), Delta Air Lines (DAL - Analyst Report), United Continental Holdings (UAL - Analyst Report) and Southwest Airlines have confirmed the receipt of written communication from the DOJ seeking information. A series of lawsuits have also been filed by passengers against the said carriers since the news surfaced.

Moreover, the dispute between Delta and Southwest Airlines over gates at the Dallas Love Field airport has also been viewed with a grain of salt. Also, the upward movement of oil prices (compared to the lows witnessed last year) has somewhat restricted the altitude gained by airline stocks. All this jointly resulted in the NYSE ARCA Airline index losing almost 9% through the first half of 2015.

Furthermore, the recent reports that the U.S. Transportation Department is investigating the possible price gouging by major U.S. carriers such as Delta, Southwest, American Airlines and JetBlue Airways Corporation (JBLU - Analyst Report) following the Amtrak train crash in May have further added to the gloom for the airline industry.

Not All Doom and Gloom

However, it has not been all bad news for the industry over the past few months. At its annual meeting, the International Air Transport Association (IATA) predicted that the airline industry will continue to see good times through 2015, thanks to weak oil prices. The IATA increased its projection for 2015 global net profit for the industry to $29.3 billion from the earlier projection of $25 billion. In comparison, the 2014 figure was $16.4 billion.

The bulk of the global profits ($15.7 billion) is expected to come from the North American region. The other regions, namely Asia-Pacific, Europe, Latin America, Middle East and Africa, are expected to generate post-tax net profit of $5.1 billion, $5.8 billion, $0.6 billion, $1.8 billion and $0.1 billion, respectively.

Global net profit margin is expected to expand to 4% in 2015. However, global revenues are expected to decline 0.7% to $727 billion mainly due to the strength of the U.S. dollar.

The IATA suggests that demand for passenger travel will improve in 2015 from 2014 levels, thanks to an improving economy. According to the forecast, 2015 is expected to see air travel growth of 6.7% compared with 6% growth witnessed last year. Moreover, projected air travel growth is higher than the trend witnessed in the last two decades, according to the IATA report.

Capacity is projected to increase by 6.2% in 2015 as opposed to 5.8% in 2014. Customers, on the other hand, will benefit from cheaper air travel, thanks to low oil prices, as one-way fares are expected to be slashed by 9.3% this year. According to the forecast, load factor (% of seats filled by passengers) for 2015 is expected to touch a record-high of 80.2%.

The research firm has also predicted that airline companies will earn $8.27 per passenger in 2015, up 67.4% year over year. The firm holds that oil prices will continue to fall in 2015 with the average price in the year hovering around $78 per barrel, down 33%. Although it is a fact that most carriers hedge at least some of their fuel costs, the majority of them should still continue to benefit considerably from the plunge in oil prices. Notably, carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge fuel costs.

Moreover, according to the IATA forecast, cargo is expected to witness the strongest growth this year since 2010. According to the IATA report, year 2015 will see commercial airline companies taking delivery of more than 1,700 new aircraft. This requires substantial investment, projected to reach approximately $180 billion.

Buoyed by their sound financial health, several carriers have voiced their intentions to invest heavily toward upgrading overall facilities associated with customer satisfaction. This is likely to result in greater travel demand, improved goodwill and eventually, a higher top line.
 
Positive A4A Forecast

According to a forecast released by Airlines for America (“A4A”) – the largest airline trade association in the U.S. – the ongoing summer season (Jun 1–Aug 31) will be one of the busiest of all times for American carriers in terms of air travel. An improving U.S. economy, strong recovery in the labor market and low fuel cost is expected to drive passenger volumes this summer to an all-time high. Moreover, the projected total volume (222 million) is 4.5% higher than the year-ago figure.

The busy summer travel schedule is mainly a reflection of the record-high levels of international travel expected by the trade organization. A4A has predicted that approximately 31 million passengers will fly abroad on U.S. airlines during the period, again an all-time record. The top 5 international destinations from the country appear to be Canada, Mexico, the United Kingdom, Germany and Japan.

Zacks Industry Rank

Within the Zacks Industry classification, airlines are broadly grouped into the Transportation sector (one of the 16 Zacks sectors).

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a point of reference, the outlook for industries in the top one-third of the list (with Zacks Industry Rank #88 and lower) is ‘Positive,’ the mid one-third of the list (between #89 and 176) is ‘Neutral,’ while the last one-third (#177 and above) is ‘Negative.’

The Zacks Industry Rank for the airline industry is currently #116, indicating the group’s near-term Neutral outlook.

Earnings Trends

The airline industry falls under the broader transportation sector. The major airline companies have already revealed their second quarter 2015 numbers. Low fuel costs have helped majority of them come up with better-than-expected earnings, however the top line growth has been dismal.

 In the transportation sector 38.5% companies have reported earnings. Total earnings for these companies are up 7.4% on only 0.4% higher revenues, with 40% of the companies beating earnings estimates and 20% coming ahead of revenue expectations.

For 2015, the sector’s earnings are poised to expand around 20.3%.For more details about earnings for this sector and others, please read our Zacks Earning Trends report.

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