Airline Stock Roundup: United Continental Q2 PRASM View Bullish, DOT's Havana Decision Grabs Headlines

The past week saw the U.S. Department of Transportation (DOT) authorizing eight U.S.-based carriers to operate commercial flights to Havana from 10 U.S. cities. The list of carriers gaining the green light includes the likes of American Airlines Group (NASDAQ:AAL) , United Continental Holdings (NYSE:UAL) , Southwest Airlines (NYSE:LUV) and Delta Air Lines (NYSE:DAL) . Apart from the Cuba-related update, the past week saw carriers such as Virgin America (NASDAQ:VA) and Southwest Airlines posting their June traffic numbers.

However, the most encouraging piece of news came from United Continental Holdings. The Chicago-based carrier reported impressive traffic numbers for the month of June with load factor (% of seats filled by passengers) rising as traffic growth outpaced capacity expansion. More than the traffic numbers, the improved second-quarter outlook for consolidated passenger revenue per available seat mile (PRASM: a key measure of unit revenue) has heartened investors, leading to a surge in stock price.

The positive impact of the United Continental update on Jul 11 was not limited to the carrier alone as the NYSE ARCA Airline index rallied 4.56% to close at $88.94 on Jul 12.

Read the last Airline Stock Roundup for Jul 05, 2016.

Recap of the Past Week’s Most Important Stories

1. The DOT, while announcing its decision on the much sought-after Havana routes, permitted eight U.S. airlines to fly to Havana from 10 U.S. cities. The DOT decision, which is in addition to the routes awarded by the DOT last month, can be seen as a giant step toward restoration of diplomatic ties with the island nation after more than 50 years (read more: 8 Airlines, 10 U.S. Cities Awarded Flights to Havana) .

2. Shares of United Continental gained 8.84% to close the trading session on Jul 12 at $46.16 following the issuance of a bullish PRASM outlook for the second quarter of 2016 (detailed results will be out on Jul 20). The carrier now expects consolidated PRASM in the second quarter to decline in the band of 6.50% to 6.75% (the previous outlook had projected a decline of 6.50% to 7.5%). The company attributed better-than-expected international yields and a surge in business travel in the final week of June (aided by the holiday period leading to the Fourth of July), as the reasons behind the enhanced outlook (read more: United Continental Issues Improved View; June Traffic Up).

3. Low-cost carrier Southwest Airlines announced strong traffic numbers for Jun 2016, with revenue passenger miles (RPMs: a measure of air traffic) improving 6.8% on a year-over-year basis to 11.5 billion. Available seat miles (ASMs: a measure of capacity) also rose 5.4% to 13.1 billion (read more: Southwest Airlines June Traffic Up 6.8% on Packed Flights).

4. Virgin America, which will be acquired by Alaska Air Group, Inc. (NYSE:ALK) in a few months time, reported an 18.7% increase in traffic on a 16.8% capacity expansion. Load factor climbed to 87% in Jun 2016 as traffic growth outpaced capacity expansion. Additionally, passenger count in the month grew 17.4%.

5. In a bid to expand further, Qatar Airways inked a deal with Latin- American carrier LATAM Airlines Group (NYSE:LFL) to acquire a stake of as much as 10% in the latter. According to a Bloomberg report, through the deal, the Gulf-based carrier intends to take advantage of LATAM Airlines’ revenue- and cost-sharing pact with International Airlines Group (LON:ICAG), the owner of British Airways. Qatar Airways also has a stake in International Airlines Group.

Price Performance

The following table shows the price movement of the major airline players over the past week and during the last 6 months.

The table shows that almost all airline stocks traded in the green over the past week, buoyed by United Continental’s bullish view. The NYSE ARCA Airline index gained 10.97% over the past week with shares of American Airlines appreciating the most (25.33%).

Over the past six months, although majority of the airline stocks lost value, the NYSE ARCA Airline index gained 13.68% due to GOL Linhas’ massive increase in stock price in the period as investors seemed to be pleased with its restructuring efforts.

What's Next in the Airline Space?

Delta Air Lines is scheduled to report its earnings numbers on Jul 14, kicking off the second quarter 2016 earnings season in the airline space. We expect the company’s earnings to be aided by low fuel costs as was the case in the last few quarters.