For Immediate Release
Chicago, IL – April 12, 2013 – Today, Zacks Equity Research discusses the U.S. Airlines, including The Boeing Company (BA), United Continental Holdings Inc. (UAL), Ryanair Holdings plc (RYAAY), Delta Air Lines Inc. (DAL) and Southwest Airlines (LUV).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at
In the base-case scenario, there are several dynamics that will act as driving factors for the overall airline profits in 2013. These include:
Passenger & Cargo: While economic instability in several regions like Europe and Latin America will keep travel growth at check, markets in Asia, the U.S. and the Middle East will continue to boost growth in the first half of 2013. The IATA projects global airline passenger growth of 5.4%, while cargo business will see expansion of 2.7%.
Coming to demand-supply balances, demand (measured in traffic) will outpace capacity (combined passenger and cargo) as the year advances. Capacity is expected to show an increase of 4.0% while air travel demand is expected to see a 4.7% pickup.
Fuel Price Effect: Airline profit outlook depends on fuel prices, the major variable component in the industry. Average crude oil prices remained relatively flat year over year at $94.05 per barrel in 2012. Lower fuel price no doubt cuts the airlines’ operating expenses, but it also indicates a slowing economy and the consequent fall in global air travel demand.
However, if pricing remains stable despite an uncertain macroeconomic outlook, the carriers will likely experience better profitability. The Association projects fuel cost of $216 billion in 2013, accounting for 33% of the overall operating costs.
Service and Fleet Restructuring: Most of the air carriers at large are scrapping or cutting flights in many small and unprofitable airports in order to reduce their fuel cost burden. The companies are also working on replacing old and depleted airplanes with new and upgraded ones. Though initially expensive, the new and improved aircraft are more fuel efficient than the existing ones and will help in lowering operating and maintenance costs.
In the coming two decades, global airlines are expected to invest nearly $3.5 trillion to buy about 27,800 new airplanes. For this, they are banking on top aircraft manufacturers such as The Boeing Company (BA) and Airbus. Over the long run, the carriers aim to replace their old narrow-body jets -- A320’s/B757-200/300 -- with advanced narrow-body airplanes such as A320 Neo and the 737 Max, enabling better services to customers and maintaining equilibrium between demand and supply.
Recently, United Continental Holdings Inc. (UAL) ordered eight Boeing 737-900ERs aircraft and Qantas Airways placed an order for five. Ryanair Holdings plc (RYAAY) inked a deal with Boeing to buy 175 new Next Generation 737-800 airplanes.
Jet Renovation: With flyers demanding comfortable and quality services along with proper security, airlines are focusing on aircraft redesigning by offering new and attractive products and services within the travel plan.
Delta Air Lines Inc. (DAL) recently launched new Fly Delta application for iPad users. The company targets investing more than $2 billion through 2013 on improved products, services and airport facilities in the air and on the ground.
Dallas-based Southwest Airlines (LUV) is upgrading its 737-700 fleet with the new Boeing Sky Interior, and renovating in-flight cabins and decorating interiors (known as Evolve) to improve customer satisfaction and experience. Additionally, the company is offering Row 44 WiFi technology-based facilities like Live Television. The company is also expanding seating capacities in Boeing 737-700s planes.
Hedging Strategies: Hedging strategies are used by airline companies to cope with the rising fuel prices. The carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge.
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