Airline Stocks Flying High On Multiple Tailwinds: 4 Picks

Stocks in the airline space are having a good time and are certainly back in favor, despite some challenges. Lets us delve deep to find out the factors behind the change in fortunes of airline stocks.

Improvement in Unit Revenue

Issues like unit revenue woes which had plagued airlines in the previous year seem to be a thing of the past. This is because the scenario regarding this key metric – a measure of sales relative to capacity for a carrier – has been improving steadily.

In fact, carriers like American Airlines Group (NASDAQ:AAL) and JetBlue Airways Corp. (NASDAQ:JBLU) have unveiled bullish unit revenue forecasts for the second quarter of 2017. JetBlue has also said that the scenario for revenue per available seat miles (RASM: a key measure of unit revenue) is expected to vastly improve for the third quarter as well.

In addition, JetBlue received encouraging news lately when Moody's Investors Service, the rating services arm of Moody's Corp., upgraded the Corporate Family Rating for the carrier to “Ba1” from “Ba3.” The firm is impressed by the carrier’s strong balance sheet and efforts to deepen focus on its popular Mint service among other factors.

Impressive Balance Sheets

Moreover, the fact that airlines are in solid financial health can be made out from their employee as well as investor-friendly moves. To this end, Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV) have hiked their quarterly dividend payouts this year. Moreover, they have also shelled out significant amounts to their employees as part of their respective profit sharing schemes.

Additionally, the robust financial health of most domestic carriers has prompted them to invest substantially in improving the flying experience for travelers, in a bid to stay afloat in the competitive airline space.

Fall in Oil Prices: A Boon for Carriers

The recent decline in oil prices bring in further good news for airlines as fuel costs represent a significant portion of their operating expenses. Currently, oil price is hovering around the $40 a barrel mark which represents a significant decline from the levels at the start of the year.

In fact, crude has lost over 20% on a year-to-date basis. It is to be noted that lower the oil prices better it is for the carriers’ bottom line. Therefore, a sharp decline in oil prices implies that stocks in the airline space will continue to make huge savings thereby bolstering their balance sheets.

Bullish IATA Forecast

At its 73rd Annual General Meeting in Cancun, Mexico, the International Air Transport Association (IATA) said that airline companies are expected to be more profitable in 2017 than previously expected. IATA now expects global net profit for the industry to come in at $31.4 billion (the earlier projection hinted at profits of $29.8 billion for 2017).

The improved projection was driven by expectations of higher demand. While air travel is expected to grow 7.4% on a year-over-year basis, cargo demand is projected to grow 7.5% in 2017.

Zacks Industry Rank Highlights the Favorable Scenario

The positive developments are reflected by the bullish Zacks Industry Rank of 59 carried by the 25-member Transportation- Airline industry.

Notably, thefavorable rank places the industry in the top 23% of the 250+ groups that are enlisted. The positioning indicates a positive outlook. In fact, our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Airline Stocks that Should Grace Your Portfolio

Given this bullish backdrop, it seems to be a prudent idea to add stocks from this high flying sector to one’s portfolio for high returns. However, with a plethora of stocks present in the airline space, it is by no means an easy task for investors to pinpoint potential outperformers. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy. We narrowed down our choices with the help of our new Style Score System .

Our research shows that stocks with a Value Style Score of 'A' or 'B' when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our Choices

United Continental Holdings (NYSE:UAL) based in Chicago is the holding company for both United Airlines and Continental Airlines. The company carries a Zacks Rank #2 and a Value Style Score of 'A.' Also, the Zacks Consensus Estimate for its current year earnings moved up 3.9% over the last 60 days to $7.26 per share.

Southwest Airlines is a passenger airline that provides scheduled air transportation in the US. The company carries a Zacks Rank #2 and a Value Style Score of 'B.' Furthermore, the Zacks Consensus Estimate for its current year earnings climbed 2.4% over the last 60 days to $3.85 per share.

SkyWest Inc. (NASDAQ:SKYW) operates as a regional airline in the US.through its subsidiaries. The company has a Zacks Rank #2 and a Value Style Score of “A.” The Zacks Consensus Estimate for its current year earnings moved up 4.3% over the last 60 days to $3.85 per share.

Deutsche Lufthansa (DE:LHAG) Aktiengesellschaft (OTC:DLAKY) operates as an aviation company in Germany as well as internationally. It operates through Passenger Airline Group, Logistics, MRO and Catering segments. Deutsche Lufthansa sports a Zacks Rank #1 and has a Value Style Score of “A.” The Zacks Consensus Estimate for its current year earnings moved up 49.5% over the last 60 days to $2.87 per share.

Looking for Ideas with Even Greater Upside?

Most of Zacks’ investment ideas are short-term, directly based on our proven 1 to 3 month indicator. In addition, I invite you to consider our long-term opportunities. These rare trades look to start fast with strong Zacks Ranks, but carry through with double and triple-digit profit potential. Starting now, you can look inside our home run, value, and stocks under $10 portfolios, plus more. Click here for a peek at this private information>>