Why Airline Stocks Surged in Wednesday's Trading Session
It is a well-documented fact that the airline industry has been struggling in the face of multiple headwinds. However, the trading session on Sep 7, 2016 brought smiles back in the faces of investors interested in the airline space as major stocks in the space surged. The buoyant performance resulted in the NYSE ARCA Airline Index gaining 2.69% to close Wednesday’s trading session at $92.45.
The Catalysts Behind the Surge
According to a Bloomberg report, stocks of the U.S. carriers appreciated the most in almost two months. The surge came on the back of encouraging forecasts from heavyweights like Delta Air Lines Inc. DAL and Southwest Airlines Co. LUV.
Fears related to overcapacity had plagued airline investors for quite some time. They were apprehensive that that airline capacity growth at a rate higher than the U.S. GDP will lead to an oversupplied market. However, the fears associated with capacity were put to rest by Dallas-based Southwest Airlines’ upbeat projection.
The low-cost carrier projects 2017 capacity to expand less than 4% on a year-over-year basis. The projection compares favorably with the view for 2016, wherein capacity is projected to increase in the range of 5% to 6%. The carrier further mentioned that most of the 2017 capacity growth (approximately 2 points) would come from domestic markets, while international expansion would account for 1–2 points.
With carriers struggling on the revenue front and declining air fares adding to the woes, the bullish projection naturally found favor with investors. As a result, shares of the low-cost carrier jumped 4.68% on Sep 7.
Industry Price Index
Industry Price Index
Atlanta, GA-based Delta Air Lines also provided a bullish outlook at the 9th Annual Global Transportation Conference regarding capacity growth in the domestic market. The airline behemoth declared that its U.S. capacity is expected to expand by only 2.5% in the final quarter of the year. This compares favorably with the 5.7% capacity growth for Delta in the U.S. market in the first half of 2016.
During a time when the entire industry is struggling with the decline in passenger revenue per available seat mile (PRASM: a key measure of unit revenue), Delta’s assertion that that it expects to be the first network carrier to return to “positive unit revenue growth” naturally pleased investors, resulting in the stock gaining 5.65%.
In fact, the carrier mentioned that revenue per available seat mile (RASM) in the U.S. market has improved substantially from summer on the implementation of “fall schedules.” The carrier’s Chief Financial Officer, Paul Jacobson, stated that RASM was already in the positive territory in the Latin American market and the metric was likely to be positive (ex-hedges) in its Pacific market in the third quarter.
The bullish comments about unit revenues provide the much-needed relief to the airline which has been on the backfoot this year. The power outage suffered by the carrier last month was the main reason behind the estimated decline of 7% in the third-quarter PRASM. Operating margin in the quarter is now expected in the band of 18% to19% as against the previous guidance of 19% to 21%, owing to the same reason. Fuel price per gallon in the third quarter is expected in the band of $1.47 to $1.52.
With oil prices rising substantially this year, Delta Air Lines believes that the era of boosted profits due to low fuel costs is behind it. The scenario of rising fuel costs would provide further scope to raise ticket prices, thereby boosting revenues. We note that Delta carries a Zacks Rank# 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of the Fort Worth, TX- based American Airlines Group AAL gained 4.84% on Sep 7 following a bullish presentation by its newly appointed president, Robert Isom, at the abovementioned transportation conference. Isom said that the carrier’s liquidity position was the best among network carriers. Its strong balance sheet has allowed it to buy back shares worth approximately $7.8 billion since third-quarter 2014.
Isom harped on the carrier’s product segmentation strategy for effective branding, selling and pricing. More segmentation was likely to further boost the top line. notably, Isom expects the “Basic Economy” segment to be launched later this year.
The Las Vegas, NV-based Allegiant Travel Company ALGT was another gainer on Sep 7 with its shares appreciating 8.16%. The company expects total revenue per available seat mile (TRASM) to decline in the band of 7.5% to 8.5%. This compares favorably with the previous guidance of a decline in the band of 8.5% to 10.5%.
The effects of the bullish updates was felt across the industry with other major carriers like United Continental Holdings UAL and JetBlue Airways Corp. JBLU gaining 4.97% and 2.83%, respectively, on Sep 7.
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