According to a projection by Airlines for America (‘A4A’) – the trade organization for leading U.S. airlines – companies in the airline space will make hay in the current spring season (Mar 1-Apr 30). It is predicted that the spring of 2017 will be the busiest spring season of all times for American carriers in terms of air travel with 4% more passengers flying to various destinations over the period compared to last year.
Additionally, A4A forecasted that 145 million passengers are likely to opt for air travel in the two-month period under consideration. This translates into approximately 2.4 million fliers per day during the period, an increase of 89,000 on a daily basis, over the comparable figure last year.
Solid Balance Sheets Prompt More Infrastructural Investments
U.S. carriers are planning to meet the surge in demand through the usage of new routes as well as larger planes. The carriers aim to offer 110,000 additional seats per day through these measures. In addition, the robust financial health of most domestic carriers has prompted them to invest substantially toward improving the flying experience for travelers, in a bid to stay afloat in the competitive airline space. This in turn has contributed significantly to the rise in travel demand, which is further augmented by the bullish spring season forecast.
Banking on their financial stability, U.S. carriers like Delta Air Lines, Inc. (DAL - Free Report) and JetBlue Airways Corp. (JBLU - Free Report) are looking to reduce their debt levels. In fact, the strong cash balance has resulted in investor-friendly activities. We note that Alaska Air Group (ALK - Free Report) hiked its quarterly dividend by 9%, earlier this year. Also, we are impressed by the efforts of the carriers to reward shareholders through share buybacks. For instance, American Airlines Group (AAL - Free Report) approved a new $2 billion buyback program earlier this year, which is scheduled to expire on Dec 31, 2018.
Furthermore, efforts to modernize their respective fleets by most carriers seem to be encouraging. The carriers belonging to A4A, are anticipated to take delivery of 337 aircraft in 2017, in a bid to refurbish their fleet and improve the flying experience of travelers.
Moreover, employee-friendly activities like profit sharing have been in vogue in the airline space. In Feb 2017, Delta paid more than $1 billion to its employees as part of its profit-sharing plan for 2016. Also, low-cost carrier Southwest Airlines (LUV - Free Report) paid $586 million to its employees as part of its profit-sharing plan for 2016.
All the above-mentioned stocks carry a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Forecast Follows Customer Satisfaction Survey
The optimistic spring season travel forecast made by A4A does not come as a surprise. It comes close on the heels of the findings of the survey, conducted by Ipsos Public Affairs. In fact, A4A had Ipsos Public Affairs to conduct the survey.
According to the survey, 49% participants revealed that they flew “commercially” at least once in 2016. The figure compared favorably to 45% recorded in 2015. Also, there was a year-over-year increase in consumer satisfaction in 2016. Moreover, it was found that 85% of the passengers were “very satisfied”/“somewhat satisfied” with their 2016 air travel experience compared with 80% in 2015.
The bullish A4A forecast for the spring season comes amid exciting times for airlines. It is an overall good times for the sector, despite occasional hiccups, which are reflected by the fact that the Zacks categorized Transportation-Airline industry has gained an impressive 27% over the last six months. This is substantially higher than the S&P 500 Index’s return of 9.41% in the period.
The bullish Zacks Industry rank of 58 carried by the 25-member Zacks categorized Transportation-Airline industry also highlights the fact that airline stocks are back in favor. The favorable rank places the industry in the top 22% of the 250+ groups enlisted.
Cheap Valuation Signals More Upside
The sector’s cheap valuation makes it a worthwhile investment option. We believe that the sector’s inexpensive valuation is one of the primary factors, behind Warren Buffett’s recent interest in the space, after shunning the sector for long. In the fourth quarter of 2016, the ‘Oracle of Omaha’ added Southwest Airlines to his holdings and raised his positions in American Airlines Group, Delta Air Lines and United Continental Holdings (UAL - Free Report) .
Going by the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio, which is often used to value airline stocks, given their significant debt levels and high depreciation and amortization expenses, doesn’t look expensive at this point.
The industry currently has a trailing 12-month EV/EBITDA ratio of 5.75, which is favorable than what the industry saw over the last five years. The ratio is nearer the low end of 4.62 and far off the high end of 16.5 during the period.
Additionally, the reading compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is 11 and the median level is 9.1. The industry’s favorable positioning compared with the overall market certainly signals more upside.
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