The Zacks Airline industry is one of the worst-hit corners of the investing world amid the ongoing coronavirus pandemic. Passenger revenues, which constitute the bulk of the top line for the airline companies, have been drastically low so far in the year as air-travel demand took a severe beating from lockdowns and travel restrictions.
That said, the availability of vaccines to combat this deadly disease is a huge positive and might boost slackening passenger revenues. Focus on cargo revenues in the current scenario of dwindling passenger revenues is encouraging too. As a result, American Airlines, JetBlue Airways and Allegiant Travel Co. are expected to gain from these positive trends.
The Zacks Airline industry includes companies engaged in transport of passengers and cargo to various destinations, globally. Most operators maintain a fleet comprising 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 make use of their respective cargo divisions for offering a wide range of freight and mail services.
4 Trends Defining the Airline Industry’s Future
Lackluster Passenger Demand: The advent of the coronavirus pandemic paralyzed air-travel demand, thereby hurting passenger revenues. What is worse is that the slight improvement in air-travel demand went for a toss with the renewed spike in coronavirus cases in the United States. Due to the consequent slowdown in bookings, the likes of Southwest Airlines and Alaska Air Group issued drab projections for the December quarter.
The prevalent dismal situation is also reflected in the IATA’s forecast that indicates the industry to incur a staggering net loss of $118.5 billion in 2020, which accounts for $66 per passenger. Passenger revenues are anticipated to be a meager $191 billion in 2020 compared with the 2019 reading of $612 billion. This gigantic collapse in passenger revenue view is mainly due to the year-over-year estimated plunge of 66% in overall passenger demand for the current year. Load factor (% of seats filled by passengers) too is likely to decline to 65.5% from 82.5% witnessed last year.
Capacity Cuts Pushing Up Non-Fuel Unit Costs: Due to reduced travel demand, airline companies are trimming capacity. As an evidence, available seat miles (a measure of capacity) slumped 56.9% in the first nine months of 2020 at United Airlines amid massive capacity cuts. As a consequence, non-fuel unit costs or cost per available seat mile excluding fuel, third-party business expenses, profit-sharing and special charges are escalating. Notably, the metric shot up 72.3% as of September end. IATA expects capacity contraction to the tune of 45% in 2020.
Vaccine Accessibility Holds out Hope: Recently, the COVID-19 vaccine, co-developed by Pfizer and BioNTech, won regulatory emergency approval in many countries including the UK and the United States after displaying a high degree of efficacy rate in clinical trials. Following this agency nod, vaccination started in the concerned countries. More recently, Moderna’s vaccine also secured the FDA nod for emergency use.
The availability of the vaccines lends a major impetus to the airline companies, which are pinning hopes on people’s return to air travel, once vaccinated, as there will be no fear of infection looming on. This, in turn, should drive passenger revenues.
The year 2021 is expected to be brighter for the airlines in view of the above-approved vaccines and many more in various stages of development. IATA’s 2021 prediction highlights this likely betterment of the scenario. IATA expects total loss for the industry to narrow down to $38.7 billion next year. IATA anticipates 2.8 billion people taking to the skies in 2021, one billion more than the current-year expectation. Load factor is likely to soar to 72.7% next year.
Uptick in Cargo Revenues: The focus of airlines on cargo revenues in the face of deflated passenger revenues is an added positive. IATA expects 2020 cargo revenues to increase to $117.7 billion from $102.4 billion in 2019. The scenario is likely to be rosier in 2021 with cargo revenues expected to rise further to $139.8 billion.
IATA expects cargo volumes to expand to 61.2 million tonnes in 2021 from the 2020 projection of 54.2 million tonnes, mainly attributable to the indispensability of air cargo in the distribution of vaccines.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Airline industry is a 27-stock group within the broader Zacks Transportation sector. It currently carries a Zacks Industry Rank #248, which places it in the bottom 3% 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 murky 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 position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. As a proof, the industry’s loss estimate for 2021 has widened to 76 cents per share from 73 cents in the past three months.
Industry Underperforms 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 dropped 26.2% over this period against the broader sector’s increase of 12.3%. The S&P 500 has also grown 18.3%.
Industry’s Current Valuation
Price/Sales (P/S) ratio is often used for valuing airline stocks. The industry currently has a forward 12-month P/S of 0.92X, compared with the S&P 500’s 4.38X. It is also below the sector’s forward-12-month P/S of 1.53X.
Over the past five years, the industry has traded as high as 0.94X, as low as 0.37X and at the median of 0.74X.
3 Airline Stocks to Keep an Eye On
American Airlines: This Fort Worth, TX-based company operates flights to multiple destinations across the globe. The company, like other airline operators, is suffering diminished passenger revenues in the current scenario. However, low fuel costs (down 25.4% in the first nine months of 2020) are offering some relief.
The company currently carries a Zacks Rank #3 (Hold). Shares of American Airlines have gained 26% in the past three months, mainly owing to vaccine-related news. The Zacks Consensus Estimate for 2021 bottom line is pegged at a loss of $5.17, narrowed from $5.42 loss, 30 days ago.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JetBlue Airways: This Long Island City, NY-based low cost carrier carries a Zacks Rank of 3, currently. Due to coronavirus-induced fall in passenger revenues, the carrier incurred losses in each of the first three quarters of 2020. However, low fuel costs (down 23.3% in the first nine months of 2020) are offering some respite.
Like other airline companies, bullish updates on coronavirus vaccines bumped up the JetBlue stock price, which has rallied 28.1% over the past three months. The Zacks Consensus Estimate for 2021 bottom line is pegged at a loss of 35 cents compared with a loss of 30 cents per share, a month ago.
Allegiant Travel Company, headquartered in Las Vegas, NV, is currently Zacks #3 Ranked. Weak air-travel demand due to coronavirus woes is denting Allegiant’s passenger revenues, which plummeted 46.5% in the first nine months of 2020. However, low fuel costs (down 30.9% as of September end) are a breather.
Like other airline companies, upbeat updates on coronavirus vaccines perked up the Allegiant stock price, which has appreciated 53.3% over the past three months. The Zacks Consensus Estimate for 2021 earnings per share has been revised 0.8% upward to $5.18 over the past 30 days.
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