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The stronger-than-expected recovery of air travel demand following the end of the pandemic has been driving the Zacks Transportation - Airline industry. While air travel demand is particularly strong on the leisure front, it is heartening to note that business demand has made an encouraging comeback. The decline in fuel expenses represents another tailwind for the industry.
Driven by the abovementioned positives, investors interested in the industry would do well to keep stocks like Delta Air Lines, American Airlines and SkyWest on their radar.
About the Industry
The Zacks Airline industry players are 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. Their 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 these companies 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
Rosy Air Traffic Scenario: It is a well-documented fact that air travel demand has bounced back strongly from the pandemic lows. The removal of COVID-related restrictions aided air travel, which is now strong on the international front as well. People are again resorting to air travel as they resume their normal activities.
Driven by upbeat passenger volumes, the International Air Transport Association or IATA has given a rosy 2024 forecast for airlines across the globe. Per IATA, the net profit of airlines across the globe is likely to be $25.7 billion in 2024, suggesting a net profit margin of 2.7%. The top line next year is anticipated to be $964 billion, implying a 7.6% increase from 2023’s estimate.
With people again taking to the skies, the greatest driver of top-line improvement is passenger revenues. Per IATA, 4.7 billion people are expected to travel in 2024, which is even higher than the 2019 (pre-pandemic) reading of $4.5 billion. Passenger revenues for the current year are anticipated to be $717 billion.
Decline in Fuel Costs: The decline in fuel expenses is another tailwind for the industry. Notably, oil price declined 10% in the October-December period. This bodes well for the bottom-line growth of airlines. This is because fuel expenses are a significant input cost for airline stocks.
Concerns about China and Germany's economic trajectories, high interest environments and record non-OPEC production from the United States, Canada, Brazil, Norway and Guyana, coupled with increased output in Iran, contributed to oil’s supply glut and the resultant price decline.
Uptick in Labor Costs: The increase in expenses on the labor front represents a major headwind for airlines. With U.S. airlines grappling with a labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
Zacks Industry Rank Signals Bright Prospects
The Zacks Airline industry is a 32-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #50, which places it in the top 20% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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 2024 has moved up 3.3% since November 2023.
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 and Sector
Over the past year, the Zacks Transportation - Airline industry has declined 4.7% against the S&P 500 composite’s rise of 20.9%. The broader sector has inched up 0.3% in the said time frame.
Valuation Picture
The price/sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.46X compared with the S&P 500’s 4.01X. It is also below the sector’s forward-12-month P/S of 1.75X.
Over the past five years, the industry has traded as high as 1.04X, as low as 0.33X and at the median of 0.57X.
3 Airline Stocks to Watch
SkyWest is based in St. George, UT. SkyWest's fleet modernization efforts are commendable. By 2026-end, SkyWest is likely to operate a total of 258 E175 aircraft. We are impressed by SKYW's efforts to reward its shareholders through buybacks. Upbeat passenger volumes also bode well.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 3.6% upward. SkyWest currently sports a Zacks Rank #1 (Strong Buy). SKYW shares have gained 37.7% over the past three months.
American Airlines is based in Fort Worth, TX. The gradual increase in air travel demand (particularly for leisure) is aiding AAL. However, high operating costs are hurting the bottom line.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 28.3% upward. AAL currently carries a Zacks Rank #2 (Buy).
Delta, based in Atlanta, is being well-served by the uptick in air travel demand. Riding on the buoyant scenario, DAL reported better-than-expected earnings per share and revenues for fourth-quarter 2023. Management projects first-quarter 2024 revenues (adjusted) to increase in the 3-6% range on a year-over-year basis.
DAL surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters, missing the mark in the other quarter, the average beat being 3%. DAL shares have gained 17.7% over the past three months. DAL currently carries a Zacks Rank #3 (Hold).
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Delta Air Lines, American Airlines and SkyWest
For Immediate Release
Chicago, IL – February 8, 2024 – Today, Zacks Equity Research discusses Delta Air Lines (DAL - Free Report) , American Airlines (AAL - Free Report) and SkyWest (SKYW - Free Report) .
Industry: Airline
Link: https://www.zacks.com/commentary/2222545/3-airline-stocks-to-watch-as-passenger-revenues-soar
The stronger-than-expected recovery of air travel demand following the end of the pandemic has been driving the Zacks Transportation - Airline industry. While air travel demand is particularly strong on the leisure front, it is heartening to note that business demand has made an encouraging comeback. The decline in fuel expenses represents another tailwind for the industry.
Driven by the abovementioned positives, investors interested in the industry would do well to keep stocks like Delta Air Lines, American Airlines and SkyWest on their radar.
About the Industry
The Zacks Airline industry players are 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. Their 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 these companies 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
Rosy Air Traffic Scenario: It is a well-documented fact that air travel demand has bounced back strongly from the pandemic lows. The removal of COVID-related restrictions aided air travel, which is now strong on the international front as well. People are again resorting to air travel as they resume their normal activities.
Driven by upbeat passenger volumes, the International Air Transport Association or IATA has given a rosy 2024 forecast for airlines across the globe. Per IATA, the net profit of airlines across the globe is likely to be $25.7 billion in 2024, suggesting a net profit margin of 2.7%. The top line next year is anticipated to be $964 billion, implying a 7.6% increase from 2023’s estimate.
With people again taking to the skies, the greatest driver of top-line improvement is passenger revenues. Per IATA, 4.7 billion people are expected to travel in 2024, which is even higher than the 2019 (pre-pandemic) reading of $4.5 billion. Passenger revenues for the current year are anticipated to be $717 billion.
Decline in Fuel Costs: The decline in fuel expenses is another tailwind for the industry. Notably, oil price declined 10% in the October-December period. This bodes well for the bottom-line growth of airlines. This is because fuel expenses are a significant input cost for airline stocks.
Concerns about China and Germany's economic trajectories, high interest environments and record non-OPEC production from the United States, Canada, Brazil, Norway and Guyana, coupled with increased output in Iran, contributed to oil’s supply glut and the resultant price decline.
Uptick in Labor Costs: The increase in expenses on the labor front represents a major headwind for airlines. With U.S. airlines grappling with a labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
Zacks Industry Rank Signals Bright Prospects
The Zacks Airline industry is a 32-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #50, which places it in the top 20% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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 2024 has moved up 3.3% since November 2023.
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 and Sector
Over the past year, the Zacks Transportation - Airline industry has declined 4.7% against the S&P 500 composite’s rise of 20.9%. The broader sector has inched up 0.3% in the said time frame.
Valuation Picture
The price/sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.46X compared with the S&P 500’s 4.01X. It is also below the sector’s forward-12-month P/S of 1.75X.
Over the past five years, the industry has traded as high as 1.04X, as low as 0.33X and at the median of 0.57X.
3 Airline Stocks to Watch
SkyWest is based in St. George, UT. SkyWest's fleet modernization efforts are commendable. By 2026-end, SkyWest is likely to operate a total of 258 E175 aircraft. We are impressed by SKYW's efforts to reward its shareholders through buybacks. Upbeat passenger volumes also bode well.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 3.6% upward. SkyWest currently sports a Zacks Rank #1 (Strong Buy). SKYW shares have gained 37.7% over the past three months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
American Airlines is based in Fort Worth, TX. The gradual increase in air travel demand (particularly for leisure) is aiding AAL. However, high operating costs are hurting the bottom line.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 28.3% upward. AAL currently carries a Zacks Rank #2 (Buy).
Delta, based in Atlanta, is being well-served by the uptick in air travel demand. Riding on the buoyant scenario, DAL reported better-than-expected earnings per share and revenues for fourth-quarter 2023. Management projects first-quarter 2024 revenues (adjusted) to increase in the 3-6% range on a year-over-year basis.
DAL surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters, missing the mark in the other quarter, the average beat being 3%. DAL shares have gained 17.7% over the past three months. DAL currently carries a Zacks Rank #3 (Hold).
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.