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Airline Industry Prospects Look Bright: Here's Why
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Airline stocks, which struggled for most of 2016 due to multiple headwinds -- declining unit revenues, depressed air fares, and low travel demand due to multiple terror attacks – nevertheless ended the year on a strong note. This is clearly evident by the NYSE ARCA Airline Index gaining over 20% in the last three months of the previous year.
We note that in the fourth-quarter earnings season, which is over for airline stocks, quite a few air carriers like Southwest Airlines Co. (LUV - Free Report) , United Continental Holdings (UAL - Free Report) , Spirit Airlines (SAVE - Free Report) and JetBlue Airways (JBLU - Free Report) outperformed on the bottom-line.
The performance with respect to the top line was also impressive. Airline heavyweights like Delta Air Lines, Inc. (DAL - Free Report) and American Airlines Group (AAL - Free Report) reported better-than-expected revenues in the quarter.
Unit Revenues Improve Steadily
One of the key factors to have plagued airlines for the majority of 2016 was declining PRASM (passenger revenue per available seat mile: a measure of sales relative to capacity for a carrier). However, unit revenue woes seem to be mitigating. This is indicated by the performance of carriers in terms of this key metric in the fourth quarter as well as bullish projections for the first quarter of 2017.
For instance, American Airlines displayed 1.3% improvement in total revenue per available seat miles (TRASM) to 14.9 cents in the fourth quarter. This was the first quarter in which the metric grew on a year-over-year basis since the fourth quarter of 2014. The company expects TRASM for the first quarter of 2017 to be up in the band of 2.5–4.5% year over year.
United Continental expects unit revenues to remain about flat in the first quarter of 2017. Delta Air Lines expects the metric in the range of flat to 2% increase in the first quarter of 2017.
Airfares & Capacity
Airline companies had been hampered by the issue of declining airfares for quite some time. Airfares have decreased in almost every month of the last year, with the decline in July being the sharpest in more than a year. However, with oil prices rising there exists the scope to raise ticket prices, thereby boosting revenues. In fact, fares have reportedly been increased by the likes of JetBlue Airways in January.
Furthermore, JetBlue’s recent decision to trim capacity growth for 2017 has found favor with investors. The Long Island City, NY-based carrier now expects available seat miles (ASMs: a measure of capacity) for full-year 2017 to grow in the band of 5.5–7.5% (prior guidance, issued in January alongside fourth-quarter results, had hinted at capacity growth in the band 6.5–8.5%). Other key carriers are also looking to curb capacity expansion with the aim of returning to unit revenue growth. Generally, carriers are forced to reduce fares as unit revenues decline in the face of capacity outpacing demand growth.
Resumption of Havana Flights: A Positive
U.S. flights to Cuban cities started after the decision of the U.S. Department of Transportation (DOT) to authorize six U.S.-based carriers to operate scheduled flights to nine second-tier Cuban cities. After the announcement in Jun 2016, the first commercial flight to Cuba from the U.S. was operated by JetBlue.
The approval to resume commercial scheduled flights to Havana was gained in Aug 2016. Major U.S. carriers started operating commercial scheduled flights to Havana from November last year after agap of more than five decades. American Airlines was the first U.S. carrier to operate a commercial flight to the Cuban capital, followed by JetBlue. The top line of carriers should benefit significantly from operations to the new destination as Havana is a favorite tourist spot.
A West Coast Powerhouse Created
The completion of the acquisition of Virgin America by Alaska Air Group (ALK - Free Report) late last year is an important development in our view. Notably, the acquisition has created the fifth-largest U.S. airline (in terms of passenger traffic). Alaska Air Group currently carries a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Following the completion of the buyout, the merged entity gained access to most of the West Coast hubs (Seattle, Portland, Anchorage, San Francisco and Los Angeles). It will also be serving the maximum number of non-stop destinations from the West Coast. The merged entity will provide 1,200 departure options per day to 118 destinations across the U.S., Mexico, Canada, Costa Rica and Cuba.
Merger-driven consolidation has played a key role in the airline industry in recent times, limiting competition. Moreover, there has been a significant improvement in operating efficiencies following mergers. Airlines were in urgent need to improve efficiencies in the early phase of the current century. These companies were suffering financially with exorbitant oil prices adding to their woes.
Trump Promise Lifts Airline Stocks
Stocks of major airline stocks appreciated on Jan 9, following the meeting of CEOs of major carriers (the CEO of American Airlines could not attend the meeting due to work) with President Trump.
The interaction led to airline stocks gaining as President Trump promised change and modernize the obsolete U.S. air traffic control system. Airline companies are also hopeful that the Trump era would see them operating with fewer regulations and in a low-tax regime.
Other Major Tailwinds
The fact that things are looking up for airline stocks is further highlighted by the fact that Warren Buffett – one of the most revered investors of all time – is continuing to take interest in airline stocks. Buffett is one of the most revered investors of all times and his interest in the sector after having shunned it for a long period of time undoubtedly bodes well for these companies.
Buffett recently increased his stakes in airline heavyweights like American Airlines Group (AAL - Free Report) , Delta Air Lines (DAL - Free Report) and United Continental Holdings (UAL - Free Report) . Additionally, Warren Buffett’s Berkshire Hathaway Inc. bought an astounding 43.2 million shares of Southwest Airlines in the fourth quarter. Buffett had initially shown interest in the sector in the third quarter, after staying away from it for a long time. In fact, his last investment in airlines was in the 1980s.
We are also impressed by the efforts of the carriers to reward shareholders through dividend payments and share buybacks. For instance, American Airlines recently approved a new $2 billion buyback program, which is scheduled to expire on Dec 31, 2018. The carrier has returned more than $9.6 billion to stockholders through share repurchases and dividends since mid-2014. Delta Air Lines has returned $3.1 billion to shareholders in 2016.
The strong cash balance has resulted in investor-friendly activities like more share buybacks and dividend payments. We note that Alaska Air Group recently hiked its quarterly dividend by 9%. Moreover, employee-friendly activities like profit sharing have also been in vogue in the airline space. Carriers like Delta Air Lines and JetBlue are also looking to reduce their debt levels based on their improved financial position.
Furthermore, efforts to modernize their respective fleets by most carriers are encouraging. While reporting fourth-quarter results last month, American Airlines stated that it took delivery of 55 new mainline aircraft and 42 regional ones in 2016. Also, the carrier invested $4.4 billion for a new aircraft during the year.
This apart, carriers are constantly investing to improve the flying experience of passengers. For instance, United Continental launched a new club at Los Angeles International Airport (LAX) in November last year. The latest “United Club” is part of the company’s $573 million project to revamp its customer-facing spaces in Terminal 7 and Concourse 8 at the airport.
Check out our latest Airline Industry Outlook for more news on the current state of affairs in this market from an earnings perspective, and how the trend looks ahead for this important sector at the moment.
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Airline Industry Prospects Look Bright: Here's Why
Airline stocks, which struggled for most of 2016 due to multiple headwinds -- declining unit revenues, depressed air fares, and low travel demand due to multiple terror attacks – nevertheless ended the year on a strong note. This is clearly evident by the NYSE ARCA Airline Index gaining over 20% in the last three months of the previous year.
We note that in the fourth-quarter earnings season, which is over for airline stocks, quite a few air carriers like Southwest Airlines Co. (LUV - Free Report) , United Continental Holdings (UAL - Free Report) , Spirit Airlines (SAVE - Free Report) and JetBlue Airways (JBLU - Free Report) outperformed on the bottom-line.
The performance with respect to the top line was also impressive. Airline heavyweights like Delta Air Lines, Inc. (DAL - Free Report) and American Airlines Group (AAL - Free Report) reported better-than-expected revenues in the quarter.
Unit Revenues Improve Steadily
One of the key factors to have plagued airlines for the majority of 2016 was declining PRASM (passenger revenue per available seat mile: a measure of sales relative to capacity for a carrier). However, unit revenue woes seem to be mitigating. This is indicated by the performance of carriers in terms of this key metric in the fourth quarter as well as bullish projections for the first quarter of 2017.
For instance, American Airlines displayed 1.3% improvement in total revenue per available seat miles (TRASM) to 14.9 cents in the fourth quarter. This was the first quarter in which the metric grew on a year-over-year basis since the fourth quarter of 2014. The company expects TRASM for the first quarter of 2017 to be up in the band of 2.5–4.5% year over year.
United Continental expects unit revenues to remain about flat in the first quarter of 2017. Delta Air Lines expects the metric in the range of flat to 2% increase in the first quarter of 2017.
Airfares & Capacity
Airline companies had been hampered by the issue of declining airfares for quite some time. Airfares have decreased in almost every month of the last year, with the decline in July being the sharpest in more than a year. However, with oil prices rising there exists the scope to raise ticket prices, thereby boosting revenues. In fact, fares have reportedly been increased by the likes of JetBlue Airways in January.
Furthermore, JetBlue’s recent decision to trim capacity growth for 2017 has found favor with investors. The Long Island City, NY-based carrier now expects available seat miles (ASMs: a measure of capacity) for full-year 2017 to grow in the band of 5.5–7.5% (prior guidance, issued in January alongside fourth-quarter results, had hinted at capacity growth in the band 6.5–8.5%). Other key carriers are also looking to curb capacity expansion with the aim of returning to unit revenue growth. Generally, carriers are forced to reduce fares as unit revenues decline in the face of capacity outpacing demand growth.
Resumption of Havana Flights: A Positive
U.S. flights to Cuban cities started after the decision of the U.S. Department of Transportation (DOT) to authorize six U.S.-based carriers to operate scheduled flights to nine second-tier Cuban cities. After the announcement in Jun 2016, the first commercial flight to Cuba from the U.S. was operated by JetBlue.
The approval to resume commercial scheduled flights to Havana was gained in Aug 2016. Major U.S. carriers started operating commercial scheduled flights to Havana from November last year after agap of more than five decades. American Airlines was the first U.S. carrier to operate a commercial flight to the Cuban capital, followed by JetBlue. The top line of carriers should benefit significantly from operations to the new destination as Havana is a favorite tourist spot.
A West Coast Powerhouse Created
The completion of the acquisition of Virgin America by Alaska Air Group (ALK - Free Report) late last year is an important development in our view. Notably, the acquisition has created the fifth-largest U.S. airline (in terms of passenger traffic). Alaska Air Group currently carries a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Following the completion of the buyout, the merged entity gained access to most of the West Coast hubs (Seattle, Portland, Anchorage, San Francisco and Los Angeles). It will also be serving the maximum number of non-stop destinations from the West Coast. The merged entity will provide 1,200 departure options per day to 118 destinations across the U.S., Mexico, Canada, Costa Rica and Cuba.
Merger-driven consolidation has played a key role in the airline industry in recent times, limiting competition. Moreover, there has been a significant improvement in operating efficiencies following mergers. Airlines were in urgent need to improve efficiencies in the early phase of the current century. These companies were suffering financially with exorbitant oil prices adding to their woes.
Trump Promise Lifts Airline Stocks
Stocks of major airline stocks appreciated on Jan 9, following the meeting of CEOs of major carriers (the CEO of American Airlines could not attend the meeting due to work) with President Trump.
The interaction led to airline stocks gaining as President Trump promised change and modernize the obsolete U.S. air traffic control system. Airline companies are also hopeful that the Trump era would see them operating with fewer regulations and in a low-tax regime.
Other Major Tailwinds
The fact that things are looking up for airline stocks is further highlighted by the fact that Warren Buffett – one of the most revered investors of all time – is continuing to take interest in airline stocks. Buffett is one of the most revered investors of all times and his interest in the sector after having shunned it for a long period of time undoubtedly bodes well for these companies.
Buffett recently increased his stakes in airline heavyweights like American Airlines Group (AAL - Free Report) , Delta Air Lines (DAL - Free Report) and United Continental Holdings (UAL - Free Report) . Additionally, Warren Buffett’s Berkshire Hathaway Inc. bought an astounding 43.2 million shares of Southwest Airlines in the fourth quarter. Buffett had initially shown interest in the sector in the third quarter, after staying away from it for a long time. In fact, his last investment in airlines was in the 1980s.
We are also impressed by the efforts of the carriers to reward shareholders through dividend payments and share buybacks. For instance, American Airlines recently approved a new $2 billion buyback program, which is scheduled to expire on Dec 31, 2018. The carrier has returned more than $9.6 billion to stockholders through share repurchases and dividends since mid-2014. Delta Air Lines has returned $3.1 billion to shareholders in 2016.
The strong cash balance has resulted in investor-friendly activities like more share buybacks and dividend payments. We note that Alaska Air Group recently hiked its quarterly dividend by 9%. Moreover, employee-friendly activities like profit sharing have also been in vogue in the airline space. Carriers like Delta Air Lines and JetBlue are also looking to reduce their debt levels based on their improved financial position.
Furthermore, efforts to modernize their respective fleets by most carriers are encouraging. While reporting fourth-quarter results last month, American Airlines stated that it took delivery of 55 new mainline aircraft and 42 regional ones in 2016. Also, the carrier invested $4.4 billion for a new aircraft during the year.
This apart, carriers are constantly investing to improve the flying experience of passengers. For instance, United Continental launched a new club at Los Angeles International Airport (LAX) in November last year. The latest “United Club” is part of the company’s $573 million project to revamp its customer-facing spaces in Terminal 7 and Concourse 8 at the airport.
Check out our latest Airline Industry Outlook for more news on the current state of affairs in this market from an earnings perspective, and how the trend looks ahead for this important sector at the moment.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>