The Zacks Airline industry houses companies engaged in the transport of passengers and cargoes to various destinations across the globe. Most operators maintain a fleet comprising multiple mainline jets in addition to several regional planes. They operate with the help of their regional airline subsidiaries and third-party regional carriers. The industry participants make use of their respective cargo divisions for providing a wide range of freight and mail services.
The space includes legacy carriers like American Airlines (AAL - Free Report) , low-cost players, such as Southwest Airlines (LUV - Free Report) and regional operators, namely SkyWest (SKYW - Free Report) . Within the low-cost segment, there are ultra low-cost carriers like Spirit Airlines.
Let’s take a look at the industry’s three major themes:
- The Airline industry has been one of the worst-hit corners in the investing space due to the coronavirus pandemic that diminished passenger revenues. In fact, woes related to this deadly health peril had a much more severe impact on the recently released airlines’ second-quarter 2020 results than on the March-quarter earnings release. This was because the entire three-month period (April to June) bore the brunt of the meltdown in air-travel demand compared to only one month (March) in the last reported quarter. Due to shrinking top lines, heavyweight airlines including Delta Air Lines (DAL - Free Report) , American Airlines and United Airlines (UAL - Free Report) incurred losses in the June quarter. The million-dollar question after such a disappointing performance is whether the airline stocks can turn things around in their favor. The answer is unfortunately an emphatic no, at least in the remainder of the year. The spike in the coronavirus cases in some parts of the United States offset the improvement in air-travel demand witnessed since late May. For example, Southwest Airlines expects operating revenues for August to plunge 70-80% year over year as bookings decreased while trip cancellations increased.
- Per the International Air Transport Association (IATA) forecast released in June, the aviation industry is estimated to suffer losses to the tune of $84.3 billion in the current year due to the coronavirus-induced crisis, which is indicative of bearing $230 million of loss per day (on average). With passengers still hesitating to board flights as they stand the risk of contracting the disease from their fellow flyers, the research firm anticipates that passengers taking to the skies will almost be halved to 2.25 billion (roughly equal to the levels recorded way back in 2006). Moreover, the industry is projected to lose $37.54 per passenger in the current year. Also, passenger revenues are predicted to tank more than 150% from the last-year levels to $241 billion. Further, load factor (% of seats filled by passengers) is anticipated to decline to 62.7% in 2020 from 82.5% recorded in 2019. The metric is expected to fall as the overall traffic decrease (54.7%) will exceed the capacity contraction of 40.4%.
- The focus of most airlines on operating cargo-only flights in the face of drained passenger revenues is praiseworthy. Evidently, cargo revenues surged 36.3% year over year in the United Airlines during the June quarter. IATA expects cargo revenues to account for 26% of the aviation industry’s top line in 2020 compared with a mere 12% in 2019. Cargo revenues are expected to increase 8.2% year over year to $110.8 billion in 2020 Low fuel prices also provide some relief to this beleaguered industry’s stocks. The recent updates on cash burn by some carriers are also encouraging. Evidently, Alaska Air Group (ALK - Free Report) expects cash burn to improve to less than $125 million in August from approximately $175 million in July.
Zacks Industry Rank Indicates Dim Outlook
The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #240, which places it in the bottom 5% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to buy or retain, let’s take a look at the industry’s recent stock-market performance and its valuation picture.
Industry Lags Sector & S&P 500
The Zacks Airline industry has lagged the broader Zacks Transportation Sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 41.1% over this period against the broader sector and the S&P 500’s increase of 5.4% and 15.8%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is a commonly used multiple for valuing airline stocks, the industry is currently trading at 15.23X compared with the S&P 500’s 12.78X. It is also above the sector’s trailing-12-month EV/EBITDA of 10.29X.
Over the past five years, the industry has traded as high as 15.7X, as low as 3.22X and at the median of 5.63X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
The near-term prospects of the airline industry appear to be dismal due to the massive slump in passenger revenues, thanks to tepid demand for air travel. In fact, IATA believes that global passenger traffic will not return to the pre-COVID-19 levels before 2024.
Moreover, the financial aid under the CARES act protects jobs at the airlines only through Sep 30, 2020. In fact, many airlines already warned of job cuts post the above date as they are grappled with the problem of overstaffing due to depressed revenues. In fact, airlines are looking at various avenues including more government funding to stay afloat. Per a Reuters report, airlines are seeking a six-month extension of the payroll support program as the desired rebound in air travel is no way a near-term possibility. Moreover, many leading carriers signed the letters of intent pertaining to their share of the $25-billion federal loan under the CARES Act.
Amid this economic gloom, the focus on cargo revenues and the fall in oil prices bode well for the industry participants as they devise plans to combat this unprecedented crisis.
Although the above-mentioned headwinds are likely to weigh on the near-term outlook, we are presenting three stocks from the industry, namely Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (VLRS - Free Report) , Southwest Airlines and American Airlines. While Controladora Vuela presently carries a Zacks Rank #2 (Buy), Southwest Airlines and American Airlines currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.