Prospects of Zacks
Transportation - Airline industry’s participants are being buoyed by the stronger-than-expected recovery in air travel demand from the pandemic lows. Air travel continues to be particularly strong on the leisure front. What is more encouraging is that international demand is also bouncing back nicely. Low fuel costs represent another tailwind for airline stocks. Driven by the abovementioned positives, investors interested in the industry would do well to keep stocks like American Airlines ( AAL Quick Quote AAL - Free Report) , Copa Holdings ( CPA Quick Quote CPA - Free Report) and Allegiant Travel Company ( ALGT Quick Quote ALGT - Free Report) on their radar. About 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 beating. However, air-travel demand is extremely rosy now. The focus on boosting cargo revenues is a positive too.
Factors Relevant to the Industry's Fortunes
The stronger-than-expected recovery in air-travel demand from pandemic lows is a huge positive for the industry, which was one of the worst-hit industries in the peak COVID-19 period. People are again resorting to air travel with the resumption of normal activities. Airline stocks are likely to continue flying high with the summer travel season fast approaching when air-travel demand is likely to swell. Per Airlines for America, U.S. airlines are Buoyant Air Traffic Scenario: anticipated to carry 257 million passengers from Jun 1 to Aug 31, 2023. The projection is at an all-time high.
Owing to the buoyant scenario with respect to air-travel demand, the International Air Transport Association or IATA has
doubled its current-year profitability (net) forecast for the industry to $9.8 billion from $4.7 billion. The top line in 2023 is now anticipated to be $803 billion compared with the previous estimate of $779 billion. The revised revenue forecast indicates a 9.7% increase from the 2022 actuals. Passenger revenues are the biggest driver of this rosy projection. Per IATA, passenger revenues in 2023 are now anticipated to be $546 billion compared with the previous estimate of $522 billion. The revised revenue forecast indicates a 27% increase from the 2022 actuals. The southward movement of oil price bodes well for the bottom-line growth of industry participants. This is because fuel expenses are a significant input cost for the aviation space. Notably, oil price declined 5.7% in the January-March period of 2023. Per IATA, the average jet fuel cost is expected to be $98.5 per barrel in 2023 (earlier forecast was $111.9 per barrel). Declining Fuel Costs:
High Labor Costs: Increased operating costs are limiting bottom-line growth. Per IATA, total expenses are expected to be $781 billion in 2023. The cost forecast indicates an 8.1% increase from the 2022 actuals. With expenses on fuel moving south, costs will likely continue to be steep going forward due to escalated labor costs. Moreover, with U.S. airlines grappling with pilot shortage, the bargaining power of this labor group has increased. As a result, we have seen pay-hike deals being inked in the space. This will result in an increase in labor costs. Zacks Industry Rank Signals Bright Prospects
The Zacks Airline industry is a 26-stock group within the broader Zacks
Transportation sector. The industry currently carries a Zacks Industry Rank #49, which places it in the top 20% of 250 plus Zacks industries.
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. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2023 has moved up 38.9% since September 2022.
Before we present a few stocks that you may want to add or retain in your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Airline industry has declined 4% against the S&P 500 composite’s rise of 4.2%. The broader sector has declined 5.5% in the said time frame.
One-Year Price Performance
The price/sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.41X compared with the S&P 500’s 3.68X. It is also below the sector’s forward-12-month P/S of 1.52X.
Over the past five years, the industry has traded as high as 1.02X, as low as 0.33X and at the median of 0.65X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Stocks to Keep a Tab on
Copa Holdings, currently sporting a Zacks Rank #1 (Strong Buy), is benefiting from an improvement in air-travel demand. In first-quarter 2023, passenger revenues increased 28.5% from first-quarter 2019 levels due to higher yields.
CPA’s focus on its cargo segment is encouraging. In first-quarter 2023, cargo and mail revenues grew 51.8% at this Latin American carrier from first-quarter 2019 levels on higher volumes and yields.
Copa Holdings' fleet modernization and cost-management efforts are commendable. The Zacks Consensus Estimate for current-year earnings has been revised 21.3% upward over the past 60 days.
Price and Consensus: CPA
Allegiant is seeing a steady recovery in domestic and leisure air travel demand. In first-quarter 2023, this Las Vegas, NV-based company’s operating revenues grew 29.9% on a year-over-year basis. Passenger revenues, accounting for 93.7% of the top line, increased 31.3% on a year-over-year basis.
Allegiant's fleet-modernization efforts are encouraging. The Zacks Consensus Estimate for ALGT's current-year earnings has been revised upward by 42.6% in the past 60 days. The stock currently sports a Zacks Rank #1.
Price and Consensus: ALGT
American Airlines, currently carrying a Zacks Rank #3 (Hold), is benefiting from an improvement in air-travel demand. Driven by the rosy passenger traffic scenario and low fuel costs, AAL’s management recently lifted its second-quarter 2023 earnings per share (excluding net special items) view and now expects the same to be in the $1.45-$1.65 range (earlier guidance: $1.20-$1.40).
Second-quarter 2023, adjusted operating margin is now anticipated in the 12.5-14.5% band (earlier guidance:11-13%). Average fuel cost per gallon is now expected in the range of $2.55-$2.65 (earlier guidance: $2.65-$2.75). The Zacks Consensus Estimate for AAL's current-year earnings has been revised upward by 11.5% in the past 60 days.
Price and Consensus: AAL