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Airline Stocks Soar on Multiple Tailwinds: What Lies Ahead?

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Airline stocks have mostly remained subdued this year, thanks to surging crude oil prices. With fuel expenses comprising a major chunk of airline expenditure, rise in fuel price certainly does not bode well for the industry.

However, the situation seems to be turning around of late, courtesy of some noteworthy tailwinds.

Let’s delve into the factors responsible for the optimism.

Dwindling Crude Oil Prices

Oil prices have been declining lately due to fears of oversupply and a weakening demand outlook. Mid-November, the price of the commodity dropped almost 20% from the October highs. Clearly, this fall in oil prices has brought huge respite to the airline industry that has struggled with low bottom-line growth for the most part of 2018. As recently as in the third quarter of 2018, earnings per share of the likes of Alaska Air Group (ALK - Free Report) and American Airlines Group (AAL - Free Report) declined year over year due to high fuel costs.
 
Solid Demand for Air Travel

With the U.S. economy improving and consumer confidence remaining strong, more Americans are taking vacations, inducing growing demand for air travel. Further, affordable air fares in addition to a much-improved job market and rising disposable income, have provided an added incentive to opt for air travel. The bullish scenario is evident from heavy traffic during this year’s Thanksgiving travel period. Major U.S. airline, Delta Air Lines (DAL - Free Report) witnessed record November traffic of more than 2.3 million customers during Nov 21-Nov 25.

Bullish Q4 Projections

Most recently, U.S. carriers Spirit Airlines (SAVE - Free Report) and Alaska Air Group provided upbeat projections for the fourth quarter of 2018. Spirit now expects total revenue per available seat miles (TRASM: a key measure of unit revenues) to increase approximately 11% year over year (the earlier view had called for this metric to increase approximately 6%). (Read more: Spirit Airlines Hikes Q4 TRASM Projection, Stock Up)

Meanwhile, Alaska Air Group now expects fourth-quarter revenue per available seat mile between 12.60 cents and 12.80 cents, reflecting an increase of 3-5% (the earlier view had predicted this metric in the 12.40-12.60 cents range). Non-fuel unit costs for the fourth quarter of 2018 are still predicted between 8.97 cents and 9.01 cents, indicating expansion of approximately 3.6%. Economic fuel cost is now projected at $2.33 per gallon compared with $2.36 estimated earlier.

Following the improved projections, shares of Spirit and Alaska Air Group are flying high with the former closing yesterday’s trading session at $62.43, up more than 6%, and the latter ending the same 5.6% higher at $74.74. Moreover, the NYSE ARCA Airline Index gained 2.4% at the close of business on Nov 28.

Improved Price Performance

The buoyancy is well reflected by the Zacks Airline industry’s price performance in a month’s time. It rallied more than 10% significantly outperforming the Zacks Transportation sector and S&P 500 Index’s respective rise of 5.1% and 1.5%.

One Month Price Performance


 

Additionally, the Zacks Industry Rank of 87 (of 250 plus groups) carried by the Zacks Airline Industry emphasizes the optimistic sentiment. This favorable rank places the companies within the top 34% slot of the Zacks industries.

What’s Lies Ahead?

With oil prices exhibiting a downward trend and the winter holiday travel period ahead, we expect airline stocks to fly high. The buoyant demand scenario may prompt other carriers to follow the footsteps of Spirit and Alaska Air Group in raising current-quarter unit revenue forecasts. This is because passenger revenues should continue to grow owing to strong demand.

In fact, travel demand is anticipated to remain strong in the long haul as well. Notably, the International Air Transport Association (IATA) expects 8.2 billion passengers to take the sky route by 2037, doubling from the current levels.
 
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