The airline industry has struggled for the most part of 2018, thanks to rising oil prices. With fuel comprising a major chunk of the airline expenditure, an upswing in crude oil prices certainly does not bode well for the industry. Apart from escalating fuel prices, high labor costs have weighed on bottom-line growth of individual companies. The airline employees’ agitation against low pay scales has propelled frequent new labor deals across the industry.
However, this adversity was partly offset by strong demand for air travel, leading to higher passenger revenues and in turn, boosting the top line. Evidently, the top line of a majority of the carriers has shown a year-over-year improvement in the first nine months of 2018. To name a few, United Continental Holdings (UAL - Free Report) , Delta Air Lines (DAL - Free Report) , American Airlines (AAL - Free Report) and Alaska Air Group (ALK - Free Report) have shown top line improvements of 8.7%, 9%, 5% and 4%, respectively.
The prime factor behind the airline industry’s recovery can be attributed to the downward trend in oil prices since mid-October. To add to it, the oil price retreat coincided with the record-setting thanksgiving travel period. Backed by such an upbeat scenario, several major U.S. carriers have provided bullish fourth-quarter projections. Alaska Air Group anticipates fourth-quarter revenue per available seat mile in the range of 12.70-12.80 cents compared with the previous guidance of 12.60-12.80 cents. The revised estimate represents a year-over-year change of 4-5%. Notably, the carrier raised its unit revenue outlook twice within a few weeks’ span.
Meanwhile, Spirit Airlines (SAVE - Free Report) predicts the same to rise approximately 11% (past view had called for an approximate 6% increase). Spirit Airlines and Southwest Airlines have also lowered forecasts for fuel cost in the final quarter of 2018. While Southwest Airlines expects fuel costs between $2.25 and $2.30 per gallon (earlier view was in the $2.30-$2.35 band), Spirit Airlines estimates economic fuel cost to be $2.27 per gallon compared with $2.46 envisioned earlier.
Despite chances of oil prices rising again in 2019 and a global economic slowdown, the International Air Transport Association (IATA) has provided a positive outlook for the industry. The research firm predicts global net profit of $35.5 billion in 2019 for the industry, above $32.3 billion expected in 2018. The industry’s revenues are predicted to increase approximately 7.7% to $885 billion. Additionally, the passenger count and cargo tonnes are also forecast to rise, totaling 4.59 billion and 65.9 million, respectively.
With tight labor market conditions and a rising disposable income, demand for air travel is anticipated to remain strong. Notably, the IATA expects 8.2 billion passengers to take the sky route by 2037, doubling the current levels.
The Zacks Industry Rank of 24 (of 250 plus groups) carried by the Zacks Airline Industry further highlights the air of optimism surrounding the space. This favorable rank places the companies within the top 10% slot of the Zacks industries.
Given this bullish backdrop, it would be wise to capitalize on the situation and invest in some top-ranked airline stocks. To zero in on the stocks, we have chosen a few outliers that have performed well in 2018, overcoming all the hostilities.
4 Prominent Picks
Given the vastness of the sector, it is by no means an easy task to arrive at likely outperformers for the coming year. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.
Based on a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy), we have zoomed in on four airline stocks, which should be added to one’s portfolio for handsome returns. You can see the complete list of today’s Zacks #1 Rank stocks here.
Spirit Airlines is an ultra low-cost carrier based in Miramar, FL. The company flaunting a Zacks Rank of 1 has been making continued efforts to improve its operational efficiency by reducing non-fuel unit costs. Notably, unit costs (excluding fuel and special items) decreased 6.8% in the first nine months of 2018. For the full year, the company expects the same to decline in the 3.5-4% band year over year. Strong passenger revenues are further driving the company’s growth. Passenger revenues jumped 25.6% in the first nine months of this year. Owing to these tailwinds, the stock has rallied a massive 28.8% so far in the year against the industry’s 25.2% decline.
The Zacks Consensus Estimate for the company’s current-year earnings has moved 18.8% north in the last 60 days. The same for 2019 has been revised 28% upward over the same time frame. Additionally, the stock carries a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Azul (AZUL - Free Report) , headquartered at Barueri, São Paulo, is one of the largest airlines in Brazil in terms of departures and destinations covered. The company has been benefiting from high passenger revenues on the back of strong air travel demand. Notably, passenger revenues augmented 19.6% on a year-over-year basis during the first nine months of 2018. Strong passenger revenues are anticipated to continue boosting the top line. The carrier’s traffic statistics in the first 11 months of 2018 also bear testimony to its solid travel demand. At the end of the first 11 months of 2018, the company registered a year-over-year increase of 16.7% and 16.3% in revenue passenger miles and available seat miles, respectively. With traffic growth outpacing capacity expansion, load factor (percentage of seats filled by passengers) improved 0.3 percentage points to 82.2%.
Shares of this #1 Ranked stock have appreciated 13% so far in 2018. The Zacks Consensus Estimate for the company’s earnings in 2019 have risen 13.3% over the last 60 days.
United Continental Holdings is the holding company for both United Airlines and Continental Airlines based in Chicago, IL. Passenger revenues have increased 8.8% in the first nine months of 2018 at United Airlines, a subsidiary of United Continental. The carrier’s strong passenger traffic is evident from the seventh straight month of load factor increase this November. Also, this Zacks Rank #2 company has been making consistent efforts to expand operations in order to attract traffic and further drive revenues. In December 2018, it announced the largest international route expansion connecting San Francisco and Seoul, beginning Apr 1, 2019. Additionally, in November 2018, the carrier entered into a joint business agreement with Copa Holdings and Avianca (including several of its affiliates) to bolster its Latin American presence.
The carrier’s projections for current-year earnings are also encouraging. It now expects earnings in 2018 between $8 and $8.75 per share (earlier outlook projected earnings of $7.25-$8.75 in 2018). The carrier is well on track to achieve its 2020 adjusted earnings guidance of $11-$13.
Owing to these tailwinds, shares of the company have gained 24.3% on a year-to-date basis. The Zacks Consensus Estimate for current-quarter earnings has moved 1.4% up in the last 60 days. The same for 2019 earnings has been raised 4.3% over the same time frame. To top it all, the company has an impressive VGM score of A.
Swire Pacific Ltd. (SWRAY - Free Report) is one of Hong Kong's leading listed companies with diversified interests in five operating divisions: Property, Aviation, Beverages, Marine Services and Trading & Industrial. The aviation division grouped under Cathay Pacific group and the Hong Kong Aircraft Engineering Company ("HAECO") group includes airline, aircraft engineering, flight catering, cargo terminal operations and ground services operations. Shares of this Zacks Rank 2 company have risen 16.2% so far in the year. Also, the stock has a commendable Value Score of A. The Zacks Consensus Estimate for 2018 earnings has been revised 15.9% upward in the last 60 days. Also, the same for 2019 earnings has been nudged 1.1% up over the same time frame.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>