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Harvey Impact on Airlines: United Continental Hit the Most

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Harvey, which wreaked havoc on Houston — America’s fourth-largest city — with heavy rainfall has negatively impacted airline operations causing multiple flight cancellations. In fact, air travel was hurt with two Houston airports, George Bush Intercontinental Airport (IAH) and William P. Hobby Airport (HOU), reportedly remaining closed for a few days (since the noon of Aug 27) due to Harvey-induced heavy rainfall. The airports are, however, currently operational.

Bleak Third-Quarter Forecasts

The picture pertaining to the extent of impact on sector participants is becoming clearer with many of them unveiling fresh forecasts for the third quarter of 2017. As was widely expected, United Continental Holdings (UAL - Free Report) , the parent company of United Airlines, has been the worst hit as Houston is the carrier’s second-largest hub. In fact, more than 7,400 flights were cancelled at IAH, with operations suspended at the airport due to the unprecedented storm, for more than four days.

The company trimmed its views with respect to pre-tax margin and passenger revenue per available seat mile (PRASM: a key measure of unit revenue) for the current quarter mainly due to Harvey at the Cowen and Company Global Transportation Conference. This Zacks Rank #3 (Hold) carrier now expects PRASM to decline between 3% and 5% year over year (the earlier guidance provided in July had called for the metric to be in the range of+1% to - 1%).In fact, Harvey has impacted the current-quarter PRASM to the tune of approximately 150 basis points. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The carrier now expects pre-tax margin between 8% and 10% (previous guidance had called for the metric to be in the range of12.5% and 14.5%). Higher fuel prices are also expected to hurt the bottom line in the third quarter. Fuel price per gallon is now projected in the band of $1.72 and $1.77 (earlier view: $1.56 to $1.61). Cost per available seat miles, excluding fuel, profit sharing, third-party business expenses and other special items, is now projected to increase between 2.5% and 3.5% (earlier view had called for an increase in the band of 2% and 3%).

The Chicago-based company now expects capacity to grow between 3% and 3.5% compared with the approximately 4% expansion projected earlier. These forecasts regarding key metrics hurt the United Continental stock badly on Sep 6. The stock closed the trading session at $60.33, down 1.3% from the Sep 5 closing price.

Apart from United Continental, Southwest Airlines Co. (LUV - Free Report) also revised its outlook for the third quarter at the same investor conference. The Dallas-based carrier had to call off approximately 2,800 flights due to the storm. Operating revenue per available seat mile (RASM) is projected in the range of down 1% to slightly up year over year. The metric was earlier projected to increase approximately 1% from the year-ago quarter.

Following the Harvey impact, the low-cost carrier trimmed its current-quarter capacity growth projection. The metric is now expected to increase between 3.5% and 4% from the earlier projected increase in the 4% to 5% range. Fuel price (economic) per gallon is now projected between $2 and $2.05 (earlier projection was in the band of $1.95 and $2).

Spirit Airlines (SAVE - Free Report) , which has significant exposure to Houston, expects its top line to shrink to the tune of approximately $8.5 million in the third quarter due to the natural calamity. Currently, Spirit Airlines anticipates total revenue per available seat mile (TRASM: a key measure of unit revenue) in the current quarter to decline between 7% and 8.5% (the previous guidance had called for a decline in the band of 2% and 4%). In fact, per the company 100 basis points of the trimmed guidance can be attributed to the negative impact of Harvey. Also, aggressive competitive pricing in its key markets contributed to the bleak forecast.

Another low-cost carrier, JetBlue Airways Corporation (JBLU - Free Report) has also revised its third quarter view on key metrics. JetBlue now expects RASM in the band of -1% to +1% (on a year-over-year basis). The earlier projection had called for the metric between -0.5% and +2.5%. The company attributed the reduction in the guidance to the prevalent competitive pricing environment. JetBlue also trimmed its capacity growth projection to the 6% to 7% range from 6.5% to 7.5% projected earlier.

Delta Air Lines (DAL - Free Report) also trimmed its passenger unit revenue outlook for the third quarter on Sep 5, while releasing its August traffic report. American Airlines Group (AAL - Free Report) expects TRASM to grow at a slower pace in the quarter due to difficult year-over-year comparisons. In fact, the metric is expected to perform better in the final quarter of 2017 compared with the current quarter.

Hurricane Irma: What’s in Store?

As if the disruptions caused by Harvey were not enough, Hurricane Irma has offered a fresh challenge to the airline companies. In fact, this latest natural calamity already resulted in cancellation of multiple flights to Caribbean cities.

Meanwhile, a controversy has erupted regarding ticket prices for flights from Florida where Hurricane Irma is fast approaching. Naturally, investors would keenly await updates on the issue and the impact of Irma on airline stocks.

In fact, stocks in the airline space have been hit hard by other headwinds like high labor costs too. The disastrous impact of Harvey has further complicated matters. Now, with Hurricane Irma emerging there seems to be little respite for the sector in the near-term going forward.

Price Performance

In view of the above headwinds, it is of little wonder that the Zacks Airline industry underperformed the broader market in the last three months. The S&P 500 Index gained 1%, as against the industry’s decline of 5.8%.


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