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Airline Stock Roundup: Labor Deal at Southwest Airlines, Strike at O'Hare Airport in Focus

LUV GOL HA DLAKY ALK UAL SAVE

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The past week saw quite a few developments in the airline space. Appearance technicians of Dallas-based low-cost carrier Southwest Airlines (LUV - Free Report) ratified a four-year tentative deal, once again highlighting the fact that labor deals are very much in vogue in the airline space. However, Latin American carrier GOL Linhas (GOL - Free Report) reported disappointing traffic data for the month of October.

With travel rush expected to surge over the next few days, passengers breathed a sigh of relief as the workers’ strike at Chicago’s O’Hare International airport is scheduled for Nov 29. This will help to avoid disruption in business during busiest days in the Thanksgiving holiday period. Germany’s Lufthansa (DLAKY - Free Report) was also in the news due to labor trouble.

The past week also saw the Bureau of Transportation Services revealing data on air fares for October. According to the report, ticket prices have fallen for the third time in the last four months. Expansion related updates also came in from Alaska Air Group’s (ALK - Free Report) subsidiary, Alaska Airlines.

(Read the last Airline Stock Roundup for Nov 15, 2016).

Transportation - Airline Industry Price Index

Transportation - Airline Industry Price Index

Recap of the Past Week’s Most Important Stories

1. Southwest Airlines got good news on the labor front when its Appearance Technicians voted in favor of a pay-related deal. Even though the tenure of the current contract is till Feb 2017, the new collective bargaining agreement becomes effective immediately. The terms of the new deal are undoubtedly favorable for Appearance Technicians, as evidenced by the large voter turnout (almost 70%). In fact, an overwhelming 88% voted in favor of the contract, which covers more than 200 Appearance Technicians of the low-cost carrier. These technicians are represented by the Aircraft Mechanics Fraternal Association (“AMFA”).

2. October traffic at GOL Linhas – measured in revenue passenger kilometers (RPK) – declined 4.4% to 2.89 billion from 3.0 billion a year-ago. Consolidated capacity (or available seat kilometers/ASKs) was down 5.1% to 3.8 billion. On the other hand, load factor – percentage of seats filled by passengers – rose to 76.0% from 75.5% in Oct 2015 as the capacity contraction was more than the decrease in traffic (Read more: GOL Linhas Posts Decline in Traffic and Capacity in October).

3. According to a report published in the Wall Street Journal, workers (non-unionized) at Chicago’s O’Hare International airport will go on strike on Nov 29, to raise their wages and secure union rights. With the strike scheduled to take place after the busiest travel day of Nov 27, travel during the Thanksgiving holiday period is unlikely to suffer (Read more: Will O'Hare Airport Strike Impact Thanksgiving Travel?).

Labor trouble continued to hurt operations at Lufthansa, a Zacks Rank #1 (Strong Buy) stock, with German carrier having to cancel 876 flights on Nov 23, following another strike by its pilots as the dispute over their pay continues. You can see the complete list of today’s Zacks #1 Rank stocks here.

4. According to data released by the Bureau of Transportation Services, airfares declined 5.2% (on an unadjusted basis) in Oct 2016 from the comparable figure in Oct 2015. Moreover, the airfares for the month showed a 2.2% decline from Sep 2016. Declining air fares have been one of the challenges confronting airline stocks and the October reading in no way mitigates the fears.

5. In a bid to expand further, Alaska Airlines Alaska Airlines announced the launch of its maiden non-stop flight between San Diego and Newark, NJ. During the week, the carrier also announced its intention to launch flights connecting San Diego and Baltimore/Washington International Thurgood Marshall Airport. Alaska Airlines intends to commence the daily non-stop flights from Mar 15, 2017. Baltimore will now become the fourth East Coast destination to be connected with San Diego since 2012, through flights operated by the Seattle, WA-based carrier (Read more: Alaska Airlines to Start Flights Between San Diego & Baltimore) .

6. The emergence and the subsequent growth and success of low-cost carriers like Spirit Airlines, Inc. (SAVE - Free Report) and Southwest Airlines have made legacy carriers rather uneasy. In a price-sensitive economy, it is not only the survival of the fittest but also of the cheapest. The graveness of the issue became even more glaring when United Continental Holdings (UAL - Free Report) announced the introduction of “Basic Economy Fares” to attract more and more budget conscious passengers. At its investor day, the carrier said that Basic Economy tickets (which are the cheapest at United Continental) will be on sale in the first quarter of next year for travel in the following quarter. Moreover, the carrier highlighted a number of strategies like bringing in more product segmentation to drive long-term growth. The carrier, through these measures as well as prudent cost management, aims to generate bottom-line improvement to the tune of $4.8 billion by 2020.

Performance

The following table shows the price movement of the major airline players over the past week and during the last 6 months. 

Company

Past Week

Last 6 months

HA

12.57%

26.76%

UAL

5.30%

57.24%

GOL

1.72%

129.91%

DAL

2.10%

13.85%

JBLU

2.43%

17.00%

AAL

3.54%

45.23%

SAVE

1.67%

28.48%

LUV

1.18%

11.58%

VA

1.12%

1.53%

ALK

4.19%

24.78%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The table above shows most of the airline stocks traded in the green over the past week leading to a 3.07% gain in the NYSE ARCA Airline index to $105.70 over the period. Shares of Hawaiian Holdings (HA - Free Report) appreciated the most (12.57%). Over the course of six months, the NYSE ARCA Airline index appreciated 26.59%. Airline stocks have been boosted as iconic investor Warren Buffett’s Berkshire Hathaway recently bought stakes in four major U.S. carriers.

What's Next in the Airline Space?

According to a Bloomberg report, Virgin America’s proposed takeover by Alaska Air Group is very near closure. Investors will keenly watch whether the deal actually closes by month-end as suggested by the report. Moreover, it is likely to be a busy week for carriers ahead with the Thanksgiving week in progress. Stay tuned for further updates on the issue.

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