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Air Fares Continue to Rise: What's Ahead for Carriers?
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Airline companies had been plagued by the issue of declining airfares for quite some time. Also, airfares have decreased in almost every month of 2016, with the decline in July being the sharpest. However, in 2017 air fares are projected to rise. Carriers like Alaska Air Group (ALK - Free Report) and Delta Air Lines (DAL - Free Report) have reportedly already hiked fares so far this year. Both the stocks carry a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Data in Details
According to data released by the Bureau of Transportation Services (BTS), average airfares (unadjusted) climbed 4.2% month on month in Feb 2017. In fact, the February reading was up 2.4% compared with Jan 2017 (on a seasonally adjusted basis).
In fact, according to research firm Hopper, airfares (domestic roundtrip) are projected to rise from $228 in February to $231 in March. In fact, the rise in travel demand for the spring season has also contributed to the increased projection. Recently, Airlines for America (‘A4A’) – the trade organization for leading U.S. airlines – came out with a bullish forecast pertaining to spring travel. Hopper has further predicted that the uptick will continue, hitting the highest point of $263 in Jun.
Uptick in Oil Prices
Lower jet fuel prices positively impacted the airline industry for the last couple of years given the inversely proportional relation between crude prices and the value of stocks. Lower oil prices had helped in keeping air fares at a low level, thereby benefitting passengers. However, with oil prices rising there exists the scope to raise ticket prices, thereby boosting revenues.
Currently, oil prices are hovering around the $49 a barrel mark. This marks a significant recovery from the 12-year low of around $26 per barrel it slipped to in Feb 2016. According to Hopper, jet fuel had increased 1.9% in Feb 2017 to around $1.54 per gallon.
Labor Costs on the Rise
With airline companies constantly inking deals with various labor groups, it is of little surprise that costs on this front are increasing. In fact, this was one of the main reasons for the lackluster bottom-line performance of many air carriers in the fourth quarter. For example, at United Continental Holdings (UAL - Free Report) , consolidated unit cost – excluding fuel, third-party business expenses and profit sharing – increased 4.1% year over year, primarily due to the labor deals ratified.
Costs on this front are expected to limit bottom-line growth in the first quarter as well. At United Continental, unit costs in the first quarter are projected to increase in the band of 4.5% to 5.5% due to higher labor costs. While American Airlines Group (AAL - Free Report) expects consolidated CASM (excluding fuel and special items) to increase 9% in the first quarter, JetBlue Airways (JBLU - Free Report) also predicts a significant uptick in the metric.
Naturally, the increasing costs on this front, too provides carriers with the opportunity to hike ticket prices further in the remainder of the year to boost their top lines to counter the pressure on bottom-lines.
Unit Revenue
After struggling on the unit revenue front in 2016, many carriers expect to return to growth with respect to this key metric this year. Hiking air fares is consistent with the carriers’ objective of returning to unit revenue this year.
Even though, the likes of Delta and Southwest Airlines (LUV - Free Report) have trimmed their respective views on unit revenues for the first quarter, the scenario with respect to this closely watched metric is steadily improving. For example, Hawaiian Holdings (HA - Free Report) anticipates operating revenue per available seat mile (RASM: a key measure of unit revenue) to grow in the band of 4–7% in the first quarter of 2017.
Moreover, most U.S. carriers are looking to curb capacity in 2017. According to a Bloomberg report, capacity expansion for U.S. airlines in 2017 is expected to be the least, since 2013. This factor also supports air fare hikes in the current year.
The above write up clearly suggests that more hikes are likely to be on the way and that air travel will be anything but pocket friendly in 2017. Naturally, investors interested in the space should keenly await updates on this burning issue.
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Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
Image: Bigstock
Air Fares Continue to Rise: What's Ahead for Carriers?
Airline companies had been plagued by the issue of declining airfares for quite some time. Also, airfares have decreased in almost every month of 2016, with the decline in July being the sharpest. However, in 2017 air fares are projected to rise. Carriers like Alaska Air Group (ALK - Free Report) and Delta Air Lines (DAL - Free Report) have reportedly already hiked fares so far this year. Both the stocks carry a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Data in Details
According to data released by the Bureau of Transportation Services (BTS), average airfares (unadjusted) climbed 4.2% month on month in Feb 2017. In fact, the February reading was up 2.4% compared with Jan 2017 (on a seasonally adjusted basis).
In fact, according to research firm Hopper, airfares (domestic roundtrip) are projected to rise from $228 in February to $231 in March. In fact, the rise in travel demand for the spring season has also contributed to the increased projection. Recently, Airlines for America (‘A4A’) – the trade organization for leading U.S. airlines – came out with a bullish forecast pertaining to spring travel. Hopper has further predicted that the uptick will continue, hitting the highest point of $263 in Jun.
Uptick in Oil Prices
Lower jet fuel prices positively impacted the airline industry for the last couple of years given the inversely proportional relation between crude prices and the value of stocks. Lower oil prices had helped in keeping air fares at a low level, thereby benefitting passengers. However, with oil prices rising there exists the scope to raise ticket prices, thereby boosting revenues.
Currently, oil prices are hovering around the $49 a barrel mark. This marks a significant recovery from the 12-year low of around $26 per barrel it slipped to in Feb 2016. According to Hopper, jet fuel had increased 1.9% in Feb 2017 to around $1.54 per gallon.
Labor Costs on the Rise
With airline companies constantly inking deals with various labor groups, it is of little surprise that costs on this front are increasing. In fact, this was one of the main reasons for the lackluster bottom-line performance of many air carriers in the fourth quarter. For example, at United Continental Holdings (UAL - Free Report) , consolidated unit cost – excluding fuel, third-party business expenses and profit sharing – increased 4.1% year over year, primarily due to the labor deals ratified.
Costs on this front are expected to limit bottom-line growth in the first quarter as well. At United Continental, unit costs in the first quarter are projected to increase in the band of 4.5% to 5.5% due to higher labor costs. While American Airlines Group (AAL - Free Report) expects consolidated CASM (excluding fuel and special items) to increase 9% in the first quarter, JetBlue Airways (JBLU - Free Report) also predicts a significant uptick in the metric.
Naturally, the increasing costs on this front, too provides carriers with the opportunity to hike ticket prices further in the remainder of the year to boost their top lines to counter the pressure on bottom-lines.
Unit Revenue
After struggling on the unit revenue front in 2016, many carriers expect to return to growth with respect to this key metric this year. Hiking air fares is consistent with the carriers’ objective of returning to unit revenue this year.
Even though, the likes of Delta and Southwest Airlines (LUV - Free Report) have trimmed their respective views on unit revenues for the first quarter, the scenario with respect to this closely watched metric is steadily improving. For example, Hawaiian Holdings (HA - Free Report) anticipates operating revenue per available seat mile (RASM: a key measure of unit revenue) to grow in the band of 4–7% in the first quarter of 2017.
Moreover, most U.S. carriers are looking to curb capacity in 2017. According to a Bloomberg report, capacity expansion for U.S. airlines in 2017 is expected to be the least, since 2013. This factor also supports air fare hikes in the current year.
Transportation - Airline Industry 5YR % Return
Transportation - Airline Industry 5YR % Return
Conclusion
The above write up clearly suggests that more hikes are likely to be on the way and that air travel will be anything but pocket friendly in 2017. Naturally, investors interested in the space should keenly await updates on this burning issue.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>