It is a well-known fact that stocks in the airline space struggled in 2018 mainly due to high fuel costs. However, with oil prices moderating in 2019, things have started looking up for airlines. The turnaround is reflected by the fact that while in 2018 Zacks Airline industry shed 22.8%, it gained 6% in the January-March period.
2018 Price Performance
Price Performance in the January-March Period
The turnaround is rather timely as the Q1 earnings season is around the corner.
Let’s find out the tailwinds to boost airlines in the upcoming earnings season.
Robust Travel Demand Driven by a Healthy Economy
The boom in domestic economy is asserted by the S&P 500 Index’s 13.1% rise in the January-March period, which marked its best start to a year since 1998. Other major bourses, including the Dow Jones Industrial Average and Nasdaq Composite surged more than 11%
Given the strength in the economy, it is of little surprise that air travel demand is solid with more Americans opting to fly. In addition to rising disposable income and low unemployment levels, affordable air fares have made air travel attractive.
Against this backdrop, passenger revenues should witness a solid uptick in in the soon-to-be-reported quarter, thereby boosting players’ top line. Airline behemoth Delta Air Lines (DAL - Free Report) will kick-start the earnings season for airlines on Apr 10.
Fuel Costs: Less of a Hindrance
With oil prices declining in excess of 20% from the highs of $76 a barrel touched in October 2018, operating expenses of airlines have decreased. As fuel is a major component of operating expenses for carriers, the reduction should support bottom-line growth in the upcoming earnings season.
As an evidence, American Airlines (AAL - Free Report) expects fuel costs in the the soon-to-be-reported quarter between $1.97 and $2.02 per gallon compared with $2.10 in the year-ago quarter. United Continental Holdings (UAL - Free Report) expects fuel price per gallon in the $2-$2.05 range in the soon-to-be-reported quarter, which compares favorably to $2.30 reported in the fourth quarter of 2018.
Financial Strength Bodes Well
Balance sheets of most airlines are in good shape. In fact, riding on their financial strength, the airline industry has invested almost $121 billion in the last few years to enhance flying experience.
The current tax law, which came into force in December 2017, has bolstered their financial standing further and is a boon to airlines as far as investor-oriented activities like dividend payments are concerned. In fact, key airline players like SkyWest (SKYW - Free Report) and Alaska Air (ALK - Free Report) have hiked their quarterly dividends this year, highlighting their financial strength. It won’t be a surprise if more shareholder-friendly announcements are made by airlines while releasing their Q1 results.
Showcasing their financial well-being, many carriers like Delta have been actively reducing their debt levels over the past few quarters and the trend is likely to continue in the soon-to-be-reported quarter,.
Zacks Industry Rank Indicates Sunny Days
The Zacks Airline industry currently carries a Zacks Industry Rank #58, which places it in the top 23% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.
Airlines in Focus
The aforementioned positives have put airline stocks in focus ahead of Q1 earnings. In view of the enthusiasm, below we have mentioned three airline stocks that should display impressive growth despite the challenges confronting this sector.
One of these stocks holds a Zacks Rank #2 (Buy). We have also mentioned two more stocks, which we believe investors should hold on to as these carry a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SkyWest, based in St. George, UT, operates a regional airline in the United States. The Zacks Consensus Estimate for first-quarter earnings has moved up 7.1% in the past 90 days. The Zacks #2 company’s expected earnings growth rate for the first quarter is 17.5%.
Allegiant Travel Company ((ALGT - Free Report) ),based in Las Vegas, NV, operates a low-cost passenger airline through its subsidiary Allegiant Air. The Zacks Consensus Estimate for first-quarter earnings has moved up 8.9% in the past 90 days. The Zacks #3 company has an expected earnings growth rate of 14.6% for the first quarter of 2019.
Spirit Airlines (SAVE - Free Report) , headquartered in Miramar, FL, provides low-fare airline services. The stock currently has a Zacks Rank #3. The Zacks Consensus Estimate for first-quarter earnings has moved up 4.8% in the past 90 days. The company’s expected earnings growth rate for the first quarter is 97.2%.
(We are reissuing this article to correct a mistake. The original article, issued on April 02, 2019, should no longer be relied upon.)