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The already struggling airline stocks suffered further blow yesterday when the key sector participant — American Airlines Group, Inc. AAL — trimmed its view for second-quarter unit revenues. The bearish view for the key metric naturally disappointed investors. Consequently, the American Airlines stock was pummelled following the bleak guidance, closing the trading session on Jul 11 at $35.96, down 8.1% over the Jul 10 close.
However, the damage was not limited to American Airlines and other key sector participants like Delta Air Lines, Inc. DAL, United Continental Holdings, Inc. UAL also felt the heat and declined significantly yesterday. Consequently, the sector tracker — the NYSE ARCA Airline Index — shed 2.4% of its value on Jul 11.
What Did American Airlines Say?
American Airlines revealed the damaging forecast at an Investor Update. Citing softer-than-expected yields in the domestic market, the airline behemoth trimmed its guidance for total revenue per available seat mile (TRASM: a key measure of unit revenue) in the soon-to-be-reported quarter.
The carrier now expects the metric to grow approximately between 1% and 3% on a year-over-year basis. The earlier guidance had called for the metric to grow approximately in the 1.5 - 3.5% range. Heightened competition in key domestic markets was primarily responsible for weak prices.
Moreover, with oil prices on an uptrend, with a 14% increase in the April-June period, American Airlines increased its second-quarter forecast for average fuel prices per gallon. The metric is now expected between $2.24 and $2.29 (previous guidance: $2.18 - $2.23).
Additionally, the carrier expects its pre-tax income to be hurt to the tune of $35 million due to the computer failure at American Airlines’ regional carrier PSA Airlines, last month. The carrier’s operations went haywire as a result of this disruption and it had to call off more than 2, 500 flights.Pre-tax margin is expected in the band of 7.5% to 9.5%.
The only favorable part of the update was regarding the second-quarter guidance on cost per available seat miles, excluding fuel and other special items. The metric is now expected to increase in the range of 1.5% to 3.5% year over year. The earlier guidance had called for the metric to grow approximately in the 2.5-4.5 % range. Lower-than-expected maintenance costs primarily led to the new projection.
Gloomy Sectoral Picture
American Airlines’ bearish projections on TRASM and fuel costs further highlight the fact that the overall sentiment pertaining to airlines is anything but positive ahead of the earnings season. This is mainly because oil prices have been on the rise this year, shooting up more than 20% so far. Apart from geopolitical tensions in the Middle East, the economic crisis in Venezuela — a major oil exporter — and OPEC’s recent plans of a lower-than-expected output raise have backed the rally in oil prices. Since fuel expenses are significant for airlines, an increase in oil prices is unfavorable for the space.
Apart from high fuel costs, expenses on the labor front are likely to limit bottom-line growth for carrier in the second quarter. Also, capacity-related woes might prevent airlines from flying high in the current earnings season. Capacity expansion may lead to oversupply in the market even as fuel costs remain well below the highs of mid-2014 despite the recent resurgence.
Moreover, airfares have remained low, with the metric declining in April, May and June. Although favorable for passengers, low air fares are a drag for airline companies. Customer-related issues represent another headwind for airlines.
For example, the flight 1380 incident on Apr 17 is still hurting Southwest Airlines Co. LUV. In fact, this Dallas-based low-cost carrier trimmed its unit revenue view for the soon-to-be reported quarter mainly due to soft bookings on its flights after the unfortunate mid-air incident, which claimed one life and injured many.
Zacks Industry Rank Highlights the Struggles
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Airline industry currently carries a Zacks Industry Rank #213, which places it at the bottom 17% of more than 250 Zacks industries. 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.
Industry Underperformance YTD
Judging by shareholder returns so far this year, it seems that headwinds like high fuel costs, capacity-related issues and technological glitches have contributed to investors’ pessimism surrounding the space.
The Zacks Airline industry, which is part of the broader Zacks Transportation Sector, has underperformed both the S&P 500 and its own sector year to date.
While the stocks in this industry have collectively lost 18.2%, the Zacks Transportation Sector has gained 3.5% of its value. Meanwhile, the Zacks S&P 500 Composite has rallied 4.7% on a year-to-date basis.
YTD Price Performance
Dump These Carriers from Your Portfolio Now
In view of the above challenges confronting carriers, we believe the second quarter earnings season can turn out to be more of a disappointment for airline players.
Given this gloomy background, we pinpoint four airline players which investors would do well to get rid of. All the stocks have an unfavorable Zacks Rank and have witnessed negative earnings estimate revisions recently.
(You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here).
Ryanair Holdings plc RYAAY is a low-cost carrier based in Ireland. The stock carries a Zacks Rank #5 (Strong Sell). This European carrier has been suffering from unrest on the labor front for quite some time. Moreover, rising fuel costs are anticipated to limit bottom-line growth.
The Zacks Consensus Estimate for fiscal 2019 and 2020 earnings moved south 6.8% and 7%, respectively, in the last 60 days. This reflects investor’s pessimism surrounding the stock.
Furthermore, the stock has a VGM Score of C, which highlights its unattractiveness. 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 investors to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. The stock has shed 7.8% of its value in the last three months.
Alaska Air Group ALK, the holding company of Alaska Airlines, is based in Seattle, WA. The stock carries a Zacks Rank #4 (Sell). High costs have been putting pressure on the company’s bottom line for quite some time, and the second quarter of 2018 is unlikely to be an exception.
The Zacks Consensus Estimate for second-quarter and current-year earnings moved south 6.3% and 7.9%, respectively, in the last 60 days. The stock has shed 18.1% of its value year to date.
SkyWest, Inc. SKYW is based in St. George, UT and operates as a regional airline in the United States through its subsidiaries. The stock carries a Zacks Rank #4. High operating expenses are likely to hurt SkyWest’s bottom line in the second quarter of 2018.
The Zacks Consensus Estimate for second-quarter earnings moved south 0.9% in the last 90 days. Moreover, the company’s Momentum Score of D further highlights its short-term unattractiveness. The stock has shed 2.1% of its value over the last six months.
Azul SA AZUL is the largest airline in Brazil in terms of the number of cities served. The Zacks Consensus Estimate of loss for the second quarter has widened significantly at Azul over the last 60 days.
Additionally, the stock, carrying a Zacks Rank #4, has seen the Zacks Consensus Estimate for current-year earnings being revised 37% downward in the last 60 days and has shed 32.2% of its value year to date. Moreover, the company’s Momentum Score of D further highlights its short-term unattractiveness.
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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
Ryanair Holdings PLC (RYAAY) : Free Stock Analysis Report
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
SkyWest, Inc. (SKYW) : Free Stock Analysis Report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
AZUL SA (AZUL) : Free Stock Analysis Report
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