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Passenger Revenues Buoy Airline Industry's Near-Term Outlook

Maharathi Basu

The Zacks Airline industry comprises companies engaged in the transport of passengers and cargo to various destinations globally. Most operators maintain a fleet of many mainline jets apart from several regional planes. They operate with the help of their regional airline subsidiaries and third-party regional carriers. The industry participants utilize their respective cargo divisions to provide a wide range of freight and mail services.

The space includes legacy carriers like American Airlines (AAL), low-cost players like Southwest Airlines (LUV) and regional operators like SkyWest (SKYW). Within the low-cost segment, there are ultra low-cost carriers like Spirit Airlines (SAVE).

Let’s take a look at the industry’s three major themes:

  • The airline industry is being aided by robust demand for travel despite headwinds like the Sino-U.S. trade tensions. Affordable air fares along with a much-improved job market and rising disposable income have provided consumers an added incentive to opt for air travel. The International Air Transport Association (“IATA”) expects 4.6 billion passengers to take to the skies in 2019, reflecting a year-over-year increase of 4.5%. What is more favorable is the fact that GDP growth globally is anticipated to be a healthy 2.7% keeping demand for passenger travel alive in 2019. Driven by upbeat passenger revenues, the top line in the aviation space is projected to increase 6.5% year over year to $865 billion this year.
  • Balance sheets of most airlines are in good shape. In fact, riding on their financial strength, the airline industry has invested more than $100 billion in the last few years to enhance flying experience. In view of their solid financial standing, investor-oriented activities like dividend payouts are also prevalent in the airline space.  In fact, key airline players like Delta Air Lines (DAL) and Southwest Airlines have hiked their quarterly dividends this year. It won’t be a surprise if more shareholder-friendly announcements are made by airlines during the remainder of the year.
  • The extended grounding period of Boeing 737 Max jets has been hurting carriers with such jets in their fleet. As evidence, American Airlines, with 24 Boeing 737 MAX jets, expects its current-year pre-tax income to be hurt to the tune of roughly $400 million due to the groundings. American Airlines stated that the jets would remain grounded till Nov 2. Due to multiple flight cancellations, non-fuel unit costs are on the rise. Southwest Airlines, which has 34 such jets in its fleet, expects current-year non-fuel unit costs to expand in the band of 8-10% year over year.
     

Zacks Industry Rank Indicates Sunny Outlook

The Zacks Airline industry is a 26-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #20, which places it in the top 8% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since the end of October 2018, the industry’s earnings estimate for the current year has increased 1.3%.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500, Outpaces Sector

The Zacks Airline industry has performed better than the broader Zacks Transportation Sector but underperformed the Zacks S&P 500 composite over the past year.

The industry has gained 0.4% over this period compared with the broader sector’s decrease of 3.5%. The S&P 500 has increased 5.1% in the said time frame.

One-Year Price Performance

 

Industry’s Current Valuation 

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing airline stocks, the industry is currently trading at 6.62X compared with the S&P 500’s 11.46X. It is also below the sector’s trailing-12-month EV/EBITDA of 7.84X.

Over the past five years, the industry has traded as high as 12.12X, as low as 4.32X and at the median of 6.01X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

 

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

Bottom Line

Despite headwinds like U.S.-China trade tensions and issues related to the grounding of Boeing 737 Max jets, the near-term prospects of the airline industry appear encouraging courtesy of a demand-backed uptick in passenger revenues. The strong financial positions of most airlines also bode well.

Here, we present three stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks are well positioned to grow this year.

JetBlue Airways (JBLU) is a low-cost company based in Long Island City, NY. The Zacks Consensus Estimate for its current-year earnings has moved up 8.7% in the past 60 days. The Zacks #1 company has an expected year-over-year earnings growth rate of 29% for 2019.

Price and Consensus: JBLU

Azul (AZUL) is the largest airline in Brazil based on the number of cities and departures. Azul, which went public in 2017, has seen the Zacks Consensus Estimate for current-year earnings being revised 14.9% upward over the past 60 days. The company has an expected year-over-year earnings growth rate of 26.4% for 2019.

Price and Consensus: AZUL

SkyWest, based in St. George, UT, operates a regional airline in the United States. The Zacks Consensus Estimate for its current-year earnings has moved up 0.2% in the past 60 days. The Zacks #2 company has an expected year-over-year earnings growth rate of 15.1% for 2019.

Price and Consensus: SKYW

 

 

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SkyWest, Inc. (SKYW) : Free Stock Analysis Report
 
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
 
Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
AZUL SA (AZUL) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
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