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 upcoming summer season (Jun 1-Aug 31). Also, it is predicted that the summer of 2017 will be the busiest season of all times for American carriers in terms of air travel. This is because 4% more passengers are expected to fly to various destinations over the period compared with the last year.
Per the forecast, approximately 234.1 million passengers will be transported through U.S. airlines this summer, which sets a record in itself. In fact, the air travel projection for the summer season translates into 2.54 million fliers per day, during the said period.
Solid Balance Sheets Prompt More Infrastructural Investments
In fact, to meet the surge in travel demand the U.S. carriers are increasing the number of available seats by 123,000 per day. Moreover, with the U.S.economy improving and consumer confidence remaining strong, more Americans are taking vacations.
Further, declining air fares in addition to a much-improved job market and rising disposable income have provided added incentive for consumers to opt for air travel. Driven by the above reasons, the three-month period is likely to see 100,000 additional passengers taking to the skies on various US carriers.
Additionally, the robust financial health of most domestic carriers has prompted them to invest substantially toward improving the flying experience for travellers, in a bid to stay afloat in the competitive airline space.
Strong Forecast Follows Tepid Q1
The bullish forecast on summer air travel by A4A comes close on the heels of the first- quarter earnings season that saw airlines performing moderately on the bottom-line front due to high costs. According to the report, the combined pre-tax earnings for nine publicly traded U.S. passenger carriers – Alaska Air Group, Inc. (ALK - Free Report) , Allegiant Travel Company (ALGT - Free Report) , American Airlines Group Inc. (AAL - Free Report) , Delta Air Lines Inc. (DAL - Free Report) , Hawaiian Holdings Inc. (HA - Free Report) , JetBlue Airways Corporation (JBLU - Free Report) , Southwest Airlines Co. (LUV - Free Report) , Spirit Airlines, Inc. (SAVE - Free Report) and United Continental Holdings, Inc. (UAL - Free Report) – declined 50% to $2.4 billion, despite a 1.5% increase in operating revenues on the back of higher traffic.
With carriers inking labor deals with various labor groups it is of little surprise that labor costs are on an upswing, thereby restricting bottom-line growth in the first quarter. Increasing fuel costs also resulted in the distortion of the earnings picture for airlines in the quarter. In fact, per the report, operating expenses increased 9.3% in the first quarter due to the two factors.
Notably, among the above-mentioned stocks, Hawaiian Holdings and United Continental carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Despite high costs limiting bottom-line growth and other hiccups, airline stocks are very much in the limelight as suggested by the performance of the Zacks categorized Transportation- Airline industry over the last three months. The industry has outperformed the S&P 500 index in the period, gaining an impressive 9.3%. This is substantially higher than the S&P 500 Index’s return of 1.1% in the period.
Additionally, the Zacks Industry Rank of 69 carried by the 25-member Zacks categorized Transportation-Airline industry highlights the fact that airline stocks are very much in favor, despite certain setbacks. It should be noted that the favorable rank places the industry in the top 27% of the 250+ groups enlisted. The bullish projection by A4A brings in further good news for airline stocks.
Cheap Valuation Signals More Upside
We believe that the sector’s cheap valuation makes it a worthwhile investment option. 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 7.87, which is favorable than what the industry saw over the last five years. The ratio is nearer the low end of 5 and far off the high end of 16.41 during the period.
Additionally, the reading compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is 10.61 and the median level is 9.3. The industry’s favorable positioning compared with the overall market certainly signals more upside.
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