According to various media reports, the U.S. Transportation Department (DOT) has tentatively awarded some carriers, including U.S. low-cost airline players like Alaska Air Group ALK, JetBlue Airways Corp. JBLU and Southwest Airlines Co. LUV, slots connecting the U.S. and Mexico. Alaska Air Group holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In the event of the approval gaining permanence, competition in the concerned routes would intensify. Apart from the above three U.S. carriers, Mexican low-cost entities like Controladora Vuela Compañía de Aviación, S.A.B. de C.V. or Volaris VLRS, VivaAerobus and Interjet have reportedly been awarded slots . However, approval from the Mexican government is awaited.
Acceptance of DOT Conditions for Delta-Aeromexico JV
The awards followed the acceptance of the DOT conditions by Atlanta, GA-based Delta Air Lines, Inc. DAL and Mexico’s largest airline Grupo Aeromexico, for extending their partnership. The acceptance had come in Dec 2016.
The DOT wanted them to give up four slot pairs (authorizations for landing or taking off) at New York’s John F. Kennedy (JFK) airport. In addition, the regulatory body ordered the carriers to relinquish 24 pairs of slots at the Mexico City airport.
Details of the Tentative Award
In the event of the aforesaid order being finalized, Seattle, WA-based Alaska Air Group will be able to operate flights connecting Mexico City’s busy Benito Juarez International Airport to San Francisco, Los Angeles and San Diego. Flights connecting Mexico City to San Francisco and San Diego will operate once a day, whereas the Mexico City and Los Angeles will be connected by two daily flights.
Long Island City, NY-based low-cost carrier JetBlue Airways, which has an extensive Latin American presence, was a big beneficiary. The carrier won sixslot pairs to Mexico City from Fort Lauderdale and Orlando, Florida, and Los Angeles.
Southwest Airlines was awarded four slot pairs connecting Mexico City to the U.S. cities of Houston, Fort Lauderdale and Los Angeles. Volaris has been aloted eight slot pairs at Mexico City’s Benito Juarez International Airport for operating flights to U.S. cities like Los Angeles and Denver. In order to enhance the connectivity between Mexico City and New York’s JFK airport, the tentative order intends to grant four slot pairs at JFK to Interjet (one), Volaris (one) and VivaAerobus (two).
Airlines’ Prospects Look Good
Currently, stocks in the airline space are seeing a slew of positive developments. Unit revenue issues, which hurt airlines significantly lately, seem to be mitigating. We note that carriers like American Airlines Group AAL and Alaska Air Group had displayed growth with respect to unit revenues in the fourth quarter of 2016. We expect more carriers to return to positive unit revenues in 2017.
Also, fuel prices on the rise and hence, airline companies have the scope of raising ticket prices to boost revenues. Moreover, their sound balance sheets have enabled carriers to indulge in shareholder-friendly activities like dividend payouts/ share buybacks. The fact that the Zacks categorized Transportation- Airline industry has comfortably outpaced the S& P 500 index over the last six months, further justifies the good times for the sector. The industry has gained 30.35% compared with the S&P 500’s growth of 5.8% since Sep 30, 2016.
Moreover, the bullish Zacks Industry rank of 66 carried by the Transportation-Airline industry also highlights the fact that airline stocks are back in favor. The favorable rank places the industry in the top 26% of the 250+ groups enlisted.
Additionally, airline stocks seem to be inexpensive at this point of time. The industry currently has a trailing 12-month EV/EBITDA ratio of 5.9, which is better than what the industry saw in the last two years. The ratio is almost near the low end of 4.7 during the period. Additionally, the reading compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 11 and the median level is 9.83. The industry’s favorable positioning compared with the overall market certainly signals more upside.
Furthermore, Warren Buffett, one of the greatest investors of all time, has decided to bet extensively on this sector. With so much running in favor of stocks in the space, the materialization of the above tentative deal would result in further positive for the sector.
With Mexico currently inviting huge traffic, courtesy the depreciation of the Mexican peso, the deal, if operational, would be a huge positive. Naturally, investor focus will remain on updates pertaining to the deal.
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Southwest Airlines Company (LUV): Free Stock Analysis Report
JetBlue Airways Corporation (JBLU): Free Stock Analysis Report
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
Alaska Air Group, Inc. (ALK): Free Stock Analysis Report
Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (VLRS): Free Stock Analysis Report
American Airlines Group, Inc. (AAL): Free Stock Analysis Report
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