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Busiest Labor Day in the Cards for U.S. Airlines Per A4A

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According to a projection by Airlines for America (‘A4A’), the trade organization for leading U.S. airlines, companies in the airline space are set to make significant gains in the upcoming Labor Day holiday period (Aug 29–Sep 4). The projection indicates 3.5% more passengers flying to various destinations over the period compared to last year.

The bullish forecast further confirms strong demand for air travel. Additionally, air fares are still low despite high fuel costs. Low ticket prices have also contributed to the favorable projection.

A4A’S Projection

According to the forecast put forward by the Washington-based trade group, approximately 16.5 million passengers will travel on U.S. airlines during the Labor Day holiday period this year, compared with 16 million people who chose to travel by air in the same period last year. The forecast translates into 2.36 million fliers per day during the abovementioned period. Moreover, Friday, Aug 31 is likely to be the busiest day for carriers in the seven-day period, with 2.76 million people expected to take to the skies on that day.

To meet the surge in travel demand, U.S. carriers are increasing the number of available seats by 92,000 per day. Also, with the U.S. economy improving and consumer confidence remaining strong, more Americans are taking vacations.

Further, affordable 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 seven-day period is likely to see 79,000 additional passengers taking to the skies per day on various U.S. carriers.

According to John Heimlich, vice president of A4A inflation-adjusted fares in the first quarter of 2018 were approximately $30 below the levels witnessed in the first quarter of 2010.

Forecast Follows Busiest Summer Season Projection

The optimistic Labor Day holiday period forecast made by A4A does not come as a surprise. It is in tune with the forecast for the busiest summer (Jun 1 to Aug 31) made in May by the same organization.

According to the above estimation, A4A had envisaged 246.1 million passengers to be transported through U.S. airlines over the Jun 1 to Aug 31 period. The anticipated surge in air traffic during the Labor Day holiday period can be viewed as an extension of this forecast. A highly successful summer season for U.S. carriers is thus projected to end on an even more jubilant note.

High Fuel Costs Remain a Worry

Despite the rosy Labor Day projection, we remain mindful of the fact that oil prices continue to rise, thereby hampering airline profits. Oil prices have risen roughly 10% year to date. Since fuel expenses are significant for airlines, an increase in oil prices is unfavorable for the space.

In fact, according to A4A, pre-tax profit margins for U.S. carriers declined to 7.2% in the first half of the year, compared with 11.5% in the comparable year-ago period. High fuel costs primarily resulted in the dismal picture.

 

Moreover, sector participants like American Airlines Group Inc. (AAL - Free Report) ,Allegiant Travel Company (ALGT - Free Report) and Delta Air Lines, Inc. (DAL - Free Report) have trimmed their respective full-year earnings per share forecasts due to high fuel costs.

Delta currently carries a Zacks Rank #3 (Hold). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Additionally, the bearish forecast by the International Air Transport Association (“IATA”) on current-year airlines’ profitability also highlights the fact that fuel cost related woes are likely to continue for carriers.

The research firm predicts global net profit for the industry to be $33.8 billion, much lower than the 2018 profitability forecast of $38.4 billion unveiled in December 2017. The firm projects jet fuel prices likely to escalate around 27.5% to $70 per barrel this year. Fuel bill is likely to account for 24.2% of total costs in 2018 (21.4% in 2017).

High Fuel Costs Likely to See Uptick in Airfares

In a bid to counter the challenges posed by surging oil prices, airlines are likely to increase air fares. They might pass on the increased costs to passengers to prevent a decline in profits.

Recently, JetBlue Airways Corporation (JBLU - Free Report) increased fees for checked bags and ticket changes. We expect other airlines to follow suite. This, in turn, should boost the top-line performance of these companies. Apart from high fuel costs, issues like the unfortunate mid-air accident at Southwest Airlines Co. (LUV - Free Report) , the plane theft and subsequent crash at Alaska Air Group, Inc. (ALK - Free Report) , capacity-related problems and high labor costs are also hurting airlines.

Industry Underperformance YTD

Judging by shareholder returns on a year-to-date basis, it seems that the abovementioned headwinds have dented investors’ confidence.

The  Zacks Airline industry, which is part of the broader Zacks Transportation Sector, has underperformed both the S&P 500 and its own sector year to date.

While the stocks in this industry have collectively lost 12.4%, the Zacks Transportation Sector has gained 1.2%. Meanwhile, the Zacks S&P 500 Composite has rallied 10.2% so far this year.

 

Zacks Industry Rank Highlights the Struggles

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.

The Zacks Airline industry currently carries a Zacks Industry Rank #230, which places it at the bottom 10% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The above write-up clearly suggests that though Labor Day projection is encouraging, thanks to strong travel demand, airlines are reeling under multiple headwinds. The buoyant travel demand might slacken if airlines raise fares significantly to combat rising fuel costs. Therefore, we expect investor focus to remain on the issue going forward.

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