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Airline Industry Gains 21.5% YTD Despite Headwinds: Here's Why

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The airline industry is currently flooded with updates on Boeing 777 jets after a United Airlines UAL 777 plane had to make an emergency landing at the Denver International Airport on Feb 20 following an engine failure. Soon after this fiasco, management at the presently Zacks Rank #4 (Sell) United Airlines announced that it was "voluntarily & temporarily" withdrawing its fleet of 24 Boeing 777 jets from service. The ill-fated plane was powered by Pratt & Whitney PW4000 engines.

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With investigations into the issue ongoing, the Federal Aviation Administration (FAA) ordered U.S. airlines to ground planes having Pratt & Whitney PW4000 engines similar to the one involved in the incident. Notably, the above engines are used only on Boeing 777s.

Per the directive, the concerned airlines must conduct a thermal acoustic image inspection of the large titanium fan blades at the front of each engine before the planes can resume service. Notably, around 125 Boeing 777 jets are powered by the PW4000-112 engine covered under the FAA order.

The directive on Boeing 777 jets is the latest blow to the aviation space, which is already reeling under the ill effects of the coronavirus pandemic. Notably, passenger revenues were crippled as air-travel demand dwindled causing airline heavyweights like Delta Air Lines DAL, United Airlines, American Airlines AAL, Alaska Air Group ALK and Southwest Airlines LUV to incur loss in each of the four quarters of 2020.

The past year was dubbed a “catastrophe” by Alexandre de Juniac, director general and CEO, International Air Transport Association (IATA) as traffic plunged 65.9% from the 2019 levels. Undoubtedly, this was the sharpest decline in traffic in the history of the aviation industry.

However, with the availability of coronavirus vaccines and the subsequent ongoing vaccination drive across the globe, airlines are hoping that air-travel demand would improve this year from the horrendous lows experienced last year. Market availability of more vaccines to stem the spread of the coronavirus as the year progresses might lead to herd immunity. This is likely to boost passenger revenues this year, the largest component of the airlines’ top lines. In fact, IATA’s current-year baseline forecasts a 50.4% improvement from the 2020 demand-level.

Another encouraging factor for the airlines is the focus on cargo-unit revenues in this era of COVID-induced weak passenger revenues. In fact, cargo revenues are likely to increase further in 2021 from the 2020 levels, boding well for the airlines.

Notably, cargo revenues, which soared 75% year over year in the final month of 2020, are expected to rise in 2021 from the 2020 levels. Evidently, per the Latin American carrier Azul’s AZUL management, fourth-quarter revenues from its logistics unit Azul Cargo Express surged 64% year over year. This phenomenal growth is primarily owing to the buoyancy in e-commerce demand as online shopping took precedence in the pandemic-ravaged times, which confines people to their homes.

IATA expects 2021 cargo revenues to increase to $139.8 billion, indicating a 26.7% rise from the reported 2019 levels. IATA expects cargo volumes to expand from 2020 levels to 61.2 million tonnes in 2021, mainly owing to the indispensability of air cargo in the distribution of vaccines.

Driven by this rosier scenario, IATA expects the global aviation industry’s loss for 2021 to be narrower than that of 2020. In fact, growth in demand for leisure travel in the United States is evident from Southwest Airlines’ commentary that February bookings are improving. The betterment of the cash burn scenario for airlines also hints at the uptick in air-travel demand. The reduction in the number of infections in the United States is an added positive as far as air-travel demand is concerned.

Despite the likely recovery in 2021 passenger revenues owing to the above-mentioned factors, demand is unlikely to revert to the pre-coronavirus levels any time soon. This implies that airlines might still have to confront the problem of overstaffing in the current year. Therefore, to protect jobs in the era of depressed demand, more federal funding is probably required.

Airlines in the United States are well served in this respect as more federal stimulus might be available shortly as part of the proposed $1.9-trillion bill. Notably, the current federal aid secures airline jobs through Mar 31, 2021.

Driven by the above-mentioned tailwinds, the Zacks Airline industry has rallied 21.5% so far this year despite headwinds, comprehensibly outperforming the S&P 500 Index’s 4.9% uptick in the same time period.

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