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July Airfares Pocket-Friendly; Cheap oil Prompts Sharp Fall
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Stocks in the airline space are being challenged by a wide number of headwinds in the form of the surge in terror attacks, prevailing uncertainty following the Brexit vote, and unit revenue related issues to name a few. Moreover, the fall in average airfares in the U.S. for Jul 2016 was the sharpest in over a year, according to data released by the Bureau of Transportation Services.
Airfares declined 4.6% (on an unadjusted basis) from the comparable figure in Jul 2015. Moreover, the reading on airfares for the month showed a 8.5% decline compared to Jun 2016. The sharp drop in airfares is primarily due to soft oil prices. Apart from cheap oil, capacity-related woes, which have been affecting airline companies for quite some time, are also being cited for the substantial slump in July airfares. Even though, the low air fares spell good news for fliers, declining air fares are likely to hurt the top line of airline companies, thereby affecting profits.
Oversupply Concerns Led to Sharp Fall in July Oil Prices
Oil prices fell sharply in July, nearly 15% according to a Reuters report and this scenario is being mentioned as the primary reason behind the significant fall in air fares in the month. Currently, oil prices are hovering around $45 a barrel. Although, this displays resurgence from the 12-year low of around $26 per barrel hit in February this year, it is nowhere near the $100+ a barrel mark witnessed in mid 2014.
With oil prices not expected to be very high in the near term, it comes as no surprise that research firm Hopper believes that airfares will continue to drop through October. Average fare per round trip is projected to come down over 8% from current levels to $213 in October.
According to our Earnings Trends report, the transportation sector of which airlines are part of, saw its top line shrink by 1.4% in the second quarter of 2016. This is worse than the 0.9% top line deceleration witnessed in the first quarter of 2016. With carriers already struggling to post significant revenue growth, low airfares mean further concerns for their top lines.
Unit Revenue Woes Continue to Hurt
Carriers have been suffering owing to unit revenue issues for quite some time and despite efforts to bring about some improvement on that front, these woes are expected to hurt carriers going ahead. Lower fuel surcharges on international flights due to weak oil prices have hurt the top line of carriers. This is exhibited by the declining key revenue metric – passenger revenue per available seat mile (PRASM: a measure of sales relative to capacity for a carrier).
The PRASM-related issues are not a thing of the past and are evident from the 7% drop in the metric at Delta Air Lines (DAL - Free Report) in July. The sharp drop was due to foreign exchange woes along with the ongoing supply-demand imbalance in the Transatlantic and softness pertaining to domestic yield. American Airlines Group (AAL - Free Report) expects total revenue per available seat mile (RASM: a measure of unit revenue) decline in the band of 3% to 5% for the third quarter
United Continental Holdings (UAL - Free Report) anticipates its consolidated passenger unit revenue to decline in the third quarter in the band of 5.5% to 7.5%. Low-cost carrier Southwest Airlines (LUV - Free Report) estimates RASM to decline in the range of 3.5% to 4.5% in the third quarter as compared to the earlier projected range of a decline of 3.0% to 4.0%. Unit revenue issues have impacted other carriers like JetBlue Airways Corporation (JBLU - Free Report) also. RASM at JetBlue fell approximately 2.5% in July. Alaska Air Group, Inc (ALK - Free Report) , which is expected to acquire Virgin America , by year-end, witnessed a 7.7% PRASM decline in the second quarter.
The above commentary clearly indicates that unit revenue issues are far from over for carriers and such headwinds will continue to hurt the top line of carriers going ahead. With airline stocks already stressed, the July reading on airfares imply further woes for the carriers on the top line front. The bearish Zacks Industry rank of 239 carried by the Transport- Airline group further highlights the struggles of carriers.
Falling Airfares: Encouraging Labor Day Forecast
The sharp fall in air fares prompted by weak oil prices is an encouraging piece of news for fliers. This is evident from the bullish Labor Day forecast by Airlines for America. According to the organization, approximately 15.6 million passengers are expected to be transported through U.S. airlines during the Labor Day holiday period this year, up 4% year over year. The forecast translates into 2.23 million fliers per day during the period (Aug 31- Sep 6), an increase of 82,000 over the comparable figure last year.
Cheap ticket price is one of the main reasons behind the bullish forecast. According to the organization, air fares slumped 5.2% in 2015. The declining trend has continued this year too with ticket prices down 6% so far this year.
We expect investor focus to remain on this burning issue of air ticket prices going forward.
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July Airfares Pocket-Friendly; Cheap oil Prompts Sharp Fall
Stocks in the airline space are being challenged by a wide number of headwinds in the form of the surge in terror attacks, prevailing uncertainty following the Brexit vote, and unit revenue related issues to name a few. Moreover, the fall in average airfares in the U.S. for Jul 2016 was the sharpest in over a year, according to data released by the Bureau of Transportation Services.
Airfares declined 4.6% (on an unadjusted basis) from the comparable figure in Jul 2015. Moreover, the reading on airfares for the month showed a 8.5% decline compared to Jun 2016. The sharp drop in airfares is primarily due to soft oil prices. Apart from cheap oil, capacity-related woes, which have been affecting airline companies for quite some time, are also being cited for the substantial slump in July airfares. Even though, the low air fares spell good news for fliers, declining air fares are likely to hurt the top line of airline companies, thereby affecting profits.
Oversupply Concerns Led to Sharp Fall in July Oil Prices
Oil prices fell sharply in July, nearly 15% according to a Reuters report and this scenario is being mentioned as the primary reason behind the significant fall in air fares in the month. Currently, oil prices are hovering around $45 a barrel. Although, this displays resurgence from the 12-year low of around $26 per barrel hit in February this year, it is nowhere near the $100+ a barrel mark witnessed in mid 2014.
With oil prices not expected to be very high in the near term, it comes as no surprise that research firm Hopper believes that airfares will continue to drop through October. Average fare per round trip is projected to come down over 8% from current levels to $213 in October.
According to our Earnings Trends report, the transportation sector of which airlines are part of, saw its top line shrink by 1.4% in the second quarter of 2016. This is worse than the 0.9% top line deceleration witnessed in the first quarter of 2016. With carriers already struggling to post significant revenue growth, low airfares mean further concerns for their top lines.
Unit Revenue Woes Continue to Hurt
Carriers have been suffering owing to unit revenue issues for quite some time and despite efforts to bring about some improvement on that front, these woes are expected to hurt carriers going ahead. Lower fuel surcharges on international flights due to weak oil prices have hurt the top line of carriers. This is exhibited by the declining key revenue metric – passenger revenue per available seat mile (PRASM: a measure of sales relative to capacity for a carrier).
The PRASM-related issues are not a thing of the past and are evident from the 7% drop in the metric at Delta Air Lines (DAL - Free Report) in July. The sharp drop was due to foreign exchange woes along with the ongoing supply-demand imbalance in the Transatlantic and softness pertaining to domestic yield. American Airlines Group (AAL - Free Report) expects total revenue per available seat mile (RASM: a measure of unit revenue) decline in the band of 3% to 5% for the third quarter
United Continental Holdings (UAL - Free Report) anticipates its consolidated passenger unit revenue to decline in the third quarter in the band of 5.5% to 7.5%. Low-cost carrier Southwest Airlines (LUV - Free Report) estimates RASM to decline in the range of 3.5% to 4.5% in the third quarter as compared to the earlier projected range of a decline of 3.0% to 4.0%. Unit revenue issues have impacted other carriers like JetBlue Airways Corporation (JBLU - Free Report) also. RASM at JetBlue fell approximately 2.5% in July. Alaska Air Group, Inc (ALK - Free Report) , which is expected to acquire Virgin America , by year-end, witnessed a 7.7% PRASM decline in the second quarter.
The above commentary clearly indicates that unit revenue issues are far from over for carriers and such headwinds will continue to hurt the top line of carriers going ahead. With airline stocks already stressed, the July reading on airfares imply further woes for the carriers on the top line front. The bearish Zacks Industry rank of 239 carried by the Transport- Airline group further highlights the struggles of carriers.
Falling Airfares: Encouraging Labor Day Forecast
The sharp fall in air fares prompted by weak oil prices is an encouraging piece of news for fliers. This is evident from the bullish Labor Day forecast by Airlines for America. According to the organization, approximately 15.6 million passengers are expected to be transported through U.S. airlines during the Labor Day holiday period this year, up 4% year over year. The forecast translates into 2.23 million fliers per day during the period (Aug 31- Sep 6), an increase of 82,000 over the comparable figure last year.
Cheap ticket price is one of the main reasons behind the bullish forecast. According to the organization, air fares slumped 5.2% in 2015. The declining trend has continued this year too with ticket prices down 6% so far this year.
We expect investor focus to remain on this burning issue of air ticket prices going forward.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>