On Feb 26, billionaire investor, Warren Buffett, continued to display his affinity for airline stocks. In an interview to CNBC, the "Oracle of Omaha" did not reject the possibility of eventually owning an airline company, thereby displaying his recent interest in the space once again.
Last year, the U.S. airline suffered significant losses due to a plethora of headwinds like back-to-back hurricanes and higher fuel costs. However, the industry recovered in the last quarter of 2017 after struggling for most of the year. The resurgence of airline stocks is evident from the fact that the NYSE ARCA Airline Index has increased 11.1% over the last 60 days.
Persistent demand for air travel outpacing the overall economic growth and the latest trend of airline operators adding capacity are likely to keep the momentum high in 2018.
President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.
The proposal to reduce corporate taxes from the current 35% to 21% is likely to bring corporate tax rate at its historic low in 78 years. A large part of airline operators book much of their revenues within the United States. Consequently, a significant reduction in corporate tax rate faced by airliners would be immediately accretive to cash flow.
Bullish IATA Forecast for 2018
In December 2017, the International Air Transport Association ("IATA") provided an encouraging outlook for the global airline industry. IATA predicts global net profit of $38.4 billion for the industry in 2018. This is much higher than the profitability forecast of $34.5 billion for 2017. This bright projection can be attributed to strong demand for air travel.
Global net profit margin is expected to improve marginally to 4.7% in 2018 from 4.6% estimated in 2017. The top line is projected at $824 billion in 2018 compared with $754 billion expected for 2017.
Optimism surrounding the air cargo business also improved. Cargo revenues are forecasted to increase to $59.2 billion in 2018 (estimated revenues for 2017 are $54.5 billion). Per the forecast, air travel growth of 6% is expected for 2018. The estimated figure for 2018 is above the average growth of 5.5% in the last 10-20 years.
Moody’s Maintain Stable 2018 Outlook
In December 2017, Moody’s Investors Services maintains 2018 outlook for the global airline industry as stable. This stable outlook is driven by projections for 8.5% to 10% operating margins for Moody’s-rated airlines through 2019, with U.S. carriers remaining the most profitable. Moody’s projects industry revenues to grow about 4%, offsetting higher labor and fuel costs. Steady global economic growth will support rising demand for air travel over the next 12 to 18 months.
Our Top Picks
The Transportation Services industry is currently in a strong position from the Zacks Industry Rank perspective. The industry is currently in the top 40% (102 out of 256) of the Zacks Categorized industries, suggesting it is well-positioned. Historically, the top 50% of the Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
A thriving and improving economy also supports the overall bullishness of the airline industry, as it implies that more passengers and cargos are being transported across the United States. Improved global growth prospects and sustained business and consumer confidence have in turn helped this industry recover from the sluggishness in 2017 to quite an extent. Easily available credit also strengthens the situation.
Given this scenario, we suggest investors add these five airline stocks to their portfolios, each of which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Delta Air Lines Inc. (DAL - Free Report) : The company has expected earnings growth of 28.6% for current year. The Zacks Consensus Estimate for the current year has improved by 15.9% over the last 60 days.
United Continental Holdings Inc. (UAL - Free Report) : The company has expected earnings growth of 10.5% for current year. The Zacks Consensus Estimate for the current year has improved by 18.4% over the last 60 days.
Southwest Airlines Co. (LUV - Free Report) : The company has expected earnings growth of 42.3% for current year. The Zacks Consensus Estimate for the current year has improved by 9.2% over the last 60 days.
Copa Holdings S.A. (CPA - Free Report) : The company has expected earnings growth of 19.5% for current year. The Zacks Consensus Estimate for the current year has improved by 4.3% over the last 60 days.
LATAM Airlines Group S.A. (LTM - Free Report) : The company has expected earnings growth of 82.1% for current year. The Zacks Consensus Estimate for the current year remains unchanged at 35 cents.
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