North American airlines are outperforming in contrast to other regional airlines. These carriers are providing excellent services to their passengers and are performing at their record levels when it comes to on-time performance, baggage handling, fewer customer complaints, lower cancellations and overbooked flights.
Though fuel price dropped to a certain extent in the month of May, the air carriers’ traffic was not encouraging. Lower fuel price no doubt cuts the operating expenses of the airlines, it also indicates a slowing economy and the consequent fall in global air travel demand.
Airline traffic is customarily measured in billions of revenue passenger miles (RPM), which implies revenue generated per mile per passenger.
Consolidated May traffic inched up 0.3% at the largest U.S. airline United Continental Holdings Inc. (UAL). Substantial 1.8% growth in international traffic was partially offset by weak domestic traffic (down 0.3%). Capacity (or available seat miles) grew 0.4% year over year while load factor (percentage of seats filled with passengers) fell 10 basis points (bps) year over year to 83.6%. United Continental expects 1% year-over-year increase in unit revenue for the month of May, measured by passenger revenue per available seat mile (:PRASM), a key metric in airlines.
The May traffic for the second largest U.S. airline Delta Air Lines (DAL) dropped 0.6% year over year due to weak domestic travel demand. Consolidated capacity slid 0.9% while the load factor improved 20 bps to 84.1%. Domestic traffic fell 2% year over year on capacity reduction of 2.4%, which partly offset a 30 bps expansion in load factor. International traffic rose 1.5% year over year on a 1.3% increase in capacity and 20 bps growths in load factor. The company’s PRASM increased 6% year over year for May.
The low-cost carrier Southwest Airlines Co. (LUV) recorded a decline of 2.6% year over year in May traffic on a capacity decrease of 0.9%. Load factor also deteriorated to 81.3% from the year-ago level of 82.7%. The company expects PRASM to increase 5%-6% year over year for May.
The discounted U.S. airline JetBlue Airways Corporation (JBLU) reported a 7.4% year-over-year traffic increase in May. On a year-over-year basis, capacity rose 4.6% and load factor grew 220 bps to 84.8%. Traffic at Alaska Air Group Inc. (ALK) also climbed 10.9% year over year, the highest compared to its rivals, in the month of May. Both capacity and load factor rose 8.3% and 200 bps year over year.
The month’s traffic for US Airways Group Inc. (LCC) dipped 0.9% year over year on a weak load factor, which contracted 100 bps. Capacity rose 0.3% year over year for the month.
The U.S. airlines are expected see a small drop this year due to weak demand for air travel and economic uncertainties in the U.S. and Europe. However, the industry poses a bright outlook over the next two decades given the improving worldwide trends in air travel.
Given the weak macroeconomic data points, we believe the carriers are ready to accept the burden of rising fuel prices as they are well positioned to endure the current crisis. Successfully passing on the increased cost to customers in the form of fare hikes and efficient use of fuel-hedging strategies are helping them to combat the rising fuel prices.
Apart from cutting capacity, air carriers are adding novel features to their services and introducing new products. These measures will fuel revenue growth and reduce non-fuel costs, thereby driving future profitability.
We are currently maintaining our long-term Neutral recommendation on Delta, United Continental, Southwest and JetBlue. For the short term (1–3 months), these stocks retain the Zacks # 3 (Hold) Rank. US Airways and Alaskahold the Zacks #2 (Buy) and Zacks #1 (Strong Buy) Ranks, respectively.Read the Full Research Report on LUV
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