The second quarter of 2019 was fraught with concerns of Boeing 737 MAX groundings for the airline industry. The groundings, which began in March, have been affecting operations with numerous flight cancellations and a consequent drop in capacity.
Notably, Southwest Airlines LUV, which has 34 737 MAX 8 aircraft in its fleet, expects non-fuel unit costs to rise 11.5-12.5% year over year in the second quarter due to the capacity constraint.
Despite this, airline players seem to be poised to surpass expectations with second-quarter results.
Let’s take a look at the factors that should help with the impressive performance.
Strong Passenger Revenues
Healthy demand for air travel has been generating robust passenger revenues (accounting for a major share of airline profits) and in turn bolstering the top line of airline companies. The stellar performance of most U.S. carriers during the Memorial Day weekend in May bears testimony to the strong demand. For instance, Delta Air Lines DAL flew more than 2.1 million passengers without a single mainline cancellation in the May 24- 27 period. In fact, a record 666,769 passengers availed Delta flights on May 24. Airlines for America’s bullish projections for the summer travel period (Jun 1-Aug 31) are further reflective of the high demand. (Read more: A4A's Bullish Summer Travel Forecast: 3 Stocks in Focus)
Owing to this tailwind, several U.S. airlines have provided upbeat unit revenue projections for the second quarter of 2019. Delta anticipates total revenue per available seat mile (a key measure of unit revenue) to grow 3.5% year over year compared with 1.5-3.5% expected in the past. Meanwhile, Southwest Airlines forecasts RASM (revenue per available seat mile) growth of 6.5-7.5% year over year compared with 5.5-7.5% expected earlier.
For the soon-to-be-reported quarter, Alaska Air Group ALK anticipates second-quarter RASM to rise 3.5-5%. The previous guidance called for an increase of 2-5%. JetBlue Airways JBLU estimates an expansion of 2-4% in the metric from a rise of 1-4% expected previously.
Growing Traffic at Latin American Carriers
The upbeat demand scenario is not only limited to the U.S. carriers as but the Latin American airlines are equally benefitting. With economic improvement, prominent carriers like Azul AZUL and Gol Linhas Aereas Inteligentes GOL have reported encouraging traffic statistics for the April-June period.
As traffic growth outpaced capacity expansion, Azul’s load factor (percentage of seats filled by passengers), a key measure of airline efficiency, improved 300 basis points (bps), 420 bps and 480 bps in April, May and June, respectively. At Gol Linhas, the metric rose 80 bps, 49 bps and 540 bps in April, May and June, respectively.
The strong traffic will translate into higher passenger revenues and reflect in overall second-quarter results.
Modest Oil Prices
Crude oil prices have remained at low levels for most part of the second quarter. Consequently, carriers like Alaska Air Group and Delta Air Lines have trimmed their fuel cost projections for the upcoming quarter. Alaska Air Group estimates the metric at $2.25 per gallon in the quarter (down from $2.30 anticipated earlier), suggesting a decline of 2% year over year. Meanwhile, Delta expects adjusted fuel costs in the range of $2.07-$2.12 per gallon (former outlook: $2.10-$2.20). In the year-ago period, the carrier’s fuel costs were $2.17 a gallon.
With fuel prices accounting for a major chunk of airline expenditures, the decline in such costs is expected to reflect in second-quarter earnings.
Surrounded by the optimism, the Zacks Airline industry carries a Zacks Rank #49, which places it at the top 19% of more than 250 Zacks industries.
3 Prominent Picks
Against this backdrop, investors should give airline stocks a thought. However, picking the right stocks can be quite a daunting task.
This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and pick winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at the VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #2 (Buy) and a VGM Score of A or B. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JetBlue Airways is a Long Island City, New York based passenger airline offering low-fare services. The carrier has a VGM Score of A and the Zacks Consensus Estimate for its second-quarter earnings has been revised 5.7% upward in the last 60 days.
The company is anticipated to perform well on the unit revenue front with the Easter/Passover holiday in April expected to drive the metric. Similar to the past few quarters, increase in passenger revenues should boost second-quarter results.
Gol Linhas is a low-fare airline based in Sao Paolo, Brazil. The company has a VGM Score of B and the Zacks Consensus Estimate for its second-quarter earnings has improved to 2 cents per share, from a loss of 6 cents 60 days ago.
Improving yields and the company’s focus on capacity discipline are likely to drive results in the quarter. Average fares are also expected to increase in the quarter and drive total revenues.
Copa Holdings CPA is a Panama City, Panama-based airline company, operating through its main subsidiaries — Copa Airlines and Copa Colombia. The company has a VGM Score of B and the Zacks Consensus Estimate for its second-quarter earnings has been revised 12.1% upward over the last 60 days.
The company’s consistent cost-reduction efforts and focus on capacity discipline to drive efficiency should aid overall results in the second quarter.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
Gol Linhas Aereas Inteligentes S.A. (GOL) : Free Stock Analysis Report
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
Southwest Airlines Co. (LUV) : Free Stock Analysis Report
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
Copa Holdings, S.A. (CPA) : Free Stock Analysis Report
AZUL SA (AZUL) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research