Zacks Industry Outlook Highlights: Delta Air Lines, American Airlines, United Continental, JetBlue Airways and Southwest Airlines

For Immediate Release

 
Chicago, IL – November 19, 2015 – Today, Zacks Equity Research discusses the Airlines, part 1, including Delta Air Lines Inc. (DAL), American Airlines Group (AAL), United Continental Holdings (UAL), JetBlue Airways (JBLU) and Southwest Airlines (LUV).                                          
Industry: Airlines, part 1

Link: https://www.zacks.com/commentary/62723/airline-industry-stock-outlook---nov-2015

Weak Oil Drives Q3 Earnings Performances

The series of earnings beats by airline companies has reinforced the well-documented fact that soft oil prices are nothing short of a godsend for stocks in the aviation space. Delta Air Lines Inc. (DAL) kick-started the third quarter earnings season for airline stocks on Oct 14, with a positive earnings surprise of 1.75%, courtesy of weak oil prices.

Other major carriers like American Airlines Group (AAL), United Continental Holdings (UAL), JetBlue Airways (JBLU) and Southwest Airlines (LUV) followed Delta in delivering third quarter earnings beats on the back of low fuel costs. Needless to say, the oil glut that has been on for well over a year now has resulted in massive savings for carriers.

For example, American Airlines Group, which does not hedge fuel costs, expects to generate savings of approximately $5 billion in 2015. The robust financial health of most U.S. carriers has prompted them to invest substantially toward improving the flying experience for travelers, in a bid to stay afloat in the competitive airline space.

Additionally, financial stability has allowed for the launch of share repurchase programs, increased dividend payments and significant reduction of debt levels at the companies. On its third quarter conference call, American Airlines announced that its board has authorized an additional $2 billion share buyback program that is expected to be completed by Dec 31, 2016.

However, as in the second quarter, revenue growth was sluggish in the third quarter as well, owing to the dollar’s strength.

Oil Weakness Key to IATA’s Bullish Forecast

That airline stocks are likely to continue their profitable run through the rest of 2015 had been hinted at by the International Air Transport Association’s (IATA) rosy forecast earlier in the year. The trade association now expects profits from the aviation industry to touch $29.3 billion in 2015 as opposed to the earlier projection of $25 billion, thanks to weak oil prices.

The bulk of the global profits ($15.7 billion) is expected from the North American region. The other regions, namely Asia-Pacific, Europe, Latin America, Middle East and Africa, are expected to generate post-tax net profit of $5.1 billion, $5.8 billion, $0.6 billion, $1.8 billion and $0.1 billion, respectively. Global net profit margin is expected to expand to 4% in 2015. However, global revenues are anticipated to decline 0.7% to $727 billion, mainly due to the strength of the dollar.

The IATA suggests that demand for passenger travel will improve in 2015 from 2014 levels, thanks to an improving economy. Customers will benefit from cheaper air travel, thanks to low oil prices, as one-way fares are expected to be slashed by 9.3% this year. According to the forecast, load factor (% of seats filled by passengers) for 2015 is expected to touch a record-high of 80.2%.

The research firm has also predicted that airline companies will earn $8.27 per passenger in 2015, up 67.4% year over year. The firm holds that oil prices will continue to fall in 2015 with the average price in the year hovering around $78 per barrel, down 33%.

The busy Labor Day holiday period (Sep 2–8) enjoyed by U.S. carriers this year further highlights the current prosperity. Moreover, the monthly global traffic numbers released by the IATA for September highlight the increased travel demand. Global travel demand improved 7.3% during the month.

Load factor climbed to 80.7% as traffic growth outpaced capacity expansion which was up 6.6%. International travel demand (up 7%) was driven by strong performance of carriers mainly from North America, the Asia-Pacific, Latin America, Europe and the Middle East while strong numbers from India, Russia and China resulted in a healthy increase in domestic traffic (up 7.8%). In Aug 2015, global travel demand had improved by 7.1%.

Not All Roses, Some Brickbats as Well

Despite the massive fall in airlines’ largest input cost, it has not been all smooth sailing for them this year. The industry has experienced quite a few challenges led by capacity and pricing worries. Investors feared that airline capacity growth at a rate higher than the U.S. GDP will lead to an oversupplied market.

The worries originated in May 2015, courtesy Southwest Airlines’ announcement of its plans to raise its capacity in the band of 7% to 8% in 2015 as opposed to the earlier projection of a 7% increase. However, following widespread investor panic, the carrier reverted to a 7% capacity growth plan and reiterated the same in the recent third quarter 2015 conference call.

Moreover, the ongoing weakness in passenger revenue per available seat mile (PRASM: a measure of unit revenue), which has hurt stocks in the space, can also be attributed partly to weak oil prices, making it a double-edged sword for carriers. Currency headwinds, coupled with lower fuel surcharges on international flights due to weak oil prices, pressurized this key metric.

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DELTA AIR LINES (DAL): Free Stock Analysis Report
 
AMER AIRLINES (AAL): Free Stock Analysis Report
 
UNITED CONT HLD (UAL): Free Stock Analysis Report
 
JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
 
SOUTHWEST AIR (LUV): Free Stock Analysis Report
 
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