Airline Stock Roundup: Improved Q3 Unit Revenue Views From United Continental, American Airlines

The past week saw airline heavyweights like United Continental Holdings (NYSE:UAL) , American Airlines Group (NASDAQ:AAL) and Southwest Airlines (NYSE:LUV) revealing traffic data for Sep 2016. Apart from the traffic numbers, American Airlines and United Continental grabbed headlines by virtue of their improved views with respect to unit revenues for the third quarter.

Latin American carrier GOL Linhas (NYSE:GOL) also invited attention by virtue of its codeshare and frequent flyer program deal with Gulf carrier Emirates. Furthermore, the past week saw Richard H. Anderson announcing his retirement from the post of Executive Chairman of Delta Air Lines’ (NYSE:DAL) Board of Directors. The move is surprising because Anderson had assumed the role of Executive Chairman as recently as May this year.

During the past week, many carriers including Delta Air Lines, JetBlue Airways Corporation (NASDAQ:JBLU) and Alaska Air Group had to cancel flights/offer refunds as Hurricane Matthew wreaked havoc.

(Read the last Airline Stock Roundup for Oct 05, 2016).

Recap of the Past Week’s Most Important Stories

1. American Airlines Group posted a decline in traffic in the month of September. Traffic – measured in revenue passenger miles (RPMs) – was 17.8 billion, down 1.7% on a year-over-year basis. Declining traffic in the Atlantic and Latin American regions contributed to the downside. On a year-over-year basis, consolidated capacity (available seat miles/ASMs) too dipped 0.4% to 21.8 billion. Another important metric, load factor (percentage of seats filled by passengers) decreased to 81.6% from 82.7% in Sep 2015 as traffic reduction outpaced capacity decline.

However, the carrier revealed an improved view with respect to total revenue per available seat mile (RASM: a key measure of unit revenue) for the third quarter, detailed results are scheduled to be revealed on Oct 20. American Airlines now expects RASM for the third quarter to decline in the band of approximately 2–3% (the earlier guidance had indicated a decline in the band of 3–5%) on a year-over-year basis. The company now expects pre-tax margin of 13–15% for the third quarter as against the previous guidance of 12–14%.

The carrier was also in the news when it inked a deal for a new joint collective bargaining agreement with its flight instructors. The carrier, which has struck deals with many labor groups of late, expects unit costs for 2016 to increase in the band of 5% to 7%. System capacity for 2016 is projected to increase approximately 1.5%.

2. Copa Holdings SA (NYSE:CPA) posted a rise in air traffic for Sep 2016. Traffic – measured in revenue passenger miles (RPMs) – came in at 1.44 billion, up 15.4% from 1.25 billion recorded last September. On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) inched up 1.6% to 1.74 billion. Load factor jumped to 82.7% from 72.8% a year ago as traffic expansion outweighed capacity growth. Currently, Copa Holdings sports a Zacks Rank # 1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

3. At United Continental Holdings, September traffic inched up 3.9% while capacity expanded 3.6%. Load factor increased to 83.2% from 82.9% a year ago as traffic expansion outweighed capacity growth. The carrier now expects consolidated passenger revenue per available seat mile (PRASM: a key measure of unit revenue) in the third quarter to decline in the band of 5.5% to 6% as against the previous guidance of a decline in the band of 5.5–7.5%. Fuel price (inclusive of all cash-settled hedges) is projected at $1.52 per gallon.

The company now expects its 2016 consolidated unit cost per available seat mile (CASM: excluding fuel, profit sharing and third-party business expenses) to increase in the band of 3.25–3.5% on a year-over-year basis. The previous outlook had projected an increase of 2.5% to 3.5%

4. Southwest Airlines announced that revenue passenger miles or RPMs (a measure of air traffic) improved 7.9% year over year to 9.94 billion. Available seat miles or ASMs (a measure of capacity) also grew 6% to 11.8 billion. Another important metric – load factor (percentage of seats filled by passengers) – improved 150 basis points (bps) to 84.2% during the month as capacity expansion was outpaced by traffic growth.

The low-cost carrier maintained its operating revenue per ASM (RASM) guidance for third-quarter 2016, detailed results of which will be released on Oct 26. RASM is still expected to decline in the range of 3.5% to 4.5% in the third quarter of 2016 on a year-over-year basis.

5. In a surprise move, Richard Anderson announced his retirement as Delta’s executive chairman. He has been replaced by Francis S. Blake, who joined the carrier’s board in Jul 2014. Anderson had been the board’s executive chairman for only five months. Anderson was appointed as the executive chairman to Delta’s board in May after retiring as the company’s CEO.

6. In a customer-friendly move, GOL Linhas inked a new codeshare and frequent flyer program deal with Emirates. The association is expected to be effective by the end of October/early November, upon approval from the Brazilian Federal Aviation Agency. A codeshare deal allows sharing of flights, which implies that a passenger has the free will to avail any flight operated by either of the companies under the agreement, irrespective of the flight number.

The contract also provides extended and seamless connectivity between flights of the two carriers. Moreover, passengers of both the carriers will benefit from this deal by means of seamless ticketing, check-in, boarding and baggage check experience while flying.

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 above shows that airline stocks exhibited a mixed trend over the past week. The NYSE ARCA Airline index decreased marginally to $91.82 over the past five trading days. Shares of Hawaiian Holdings depreciated the most (4.18%). Over the course of six months, the NYSE ARCA Airline index appreciated marginally.

What's Next in the Airline Space?

Delta Air Lines is scheduled to report its earnings numbers on Oct 13, kicking off the third-quarter 2016 earnings season in the airline space. Focus will also be on United Continental’s earnings report, scheduled to be revealed on Oct 17.

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