IATA Lifts 2017 Profit View On Higher Demand: 5 Solid Picks

The airline industry received encouraging news when the International Air Transport Association (IATA) increased its projection for 2017 global net profit for the industry by 5.4% to $31.4 billion. At its 73^rd Annual General Meeting in Cancun, Mexico, the research firm said that despite the rising fuel prices and labor costs, airline companies are expected to be more profitable in 2017 than previously expected.

Why the Higher Forecast?

According to the revised forecast, air travel growth of 7.4% is expected in 2017 (earlier forecast was 5.1%). The improved demand scenario is anticipated to result in 4.1 billion passengers taking to the skies in 2017 (275 million passengers more than 2016 levels). In the event of this forecast coming true, 2017 would witness the highest year-over-year growth.

In fact, average passenger load factor (% of seats filled by passengers) is projected to exceed the 2016 levels of 80.3% by 30 basis points. The increase in load factor implies that traffic growth is likely to exceed the anticipated capacity expansion in 2017.

Not only is the IATA bullish about passenger demand, it paints a rosy picture for cargos as well. According to the report, cargo demand is projected to grow 7.5% in 2017 over 2016 levels. The revised projection is well above the 4% growth expected earlier and the 3.6% realized in 2016.

The above bullish projections have led to the IATA expecting the top line to come in at $743 billion for 2017, which compares favorably with the earlier forecast of $736 billion and the 2016 figure of $705 billion.

The bulk of the global profits ($15.4 billion) are expected to come from the North American region. The other regions, namely, Asia-Pacific, Europe, Latin America and Middle East are expected to generate post-tax net profit of $7.4 billion, $7.4 billion, $0.8 billion and $0.4 billion, respectively. African carriers are expected to continue their dismal performance in 2017, suffering losses to the tune of $0.1 billion.

Higher Costs Pressurizing the Bottom Line

Even though the forecast on revenues is a bullish one, the scenario is not so with respect to the bottom line. This is due to higher fuel costs and labor expenses. Average oil price for 2017 is expected to be $54 per barrel for Brent Crude (the comparable figure in 2016 was $44.6 per barrel). With most airlines including heavyweights in the US aviation space like American Airlines Group (NASDAQ:AAL) and Delta Air Lines (NYSE:DAL) inking labor deals, it is of little surprise that labor costs are surging. IATA expects unit labor costs to increase by approximately 3% in 2017.

The research firm has also predicted that airline companies will earn $7.69 per passenger in 2017 compared with $9.1 in 2016. Global net profit margin is expected to decline to 4.2% in 2017 from 4.9% a year ago. In fact, it is due to higher costs that total net profit, despite the upward revision, is projected to come in below 2016 levels of $34.8 billion.

IATA Forecast Follows Bullish A4A View

The rosy picture painted by the IATA for North American carriers, comes close on the heels of the forecast provided by Airlines for America (‘A4A’). According to the projection, the three-month period between June and August will be the busiest one for the U.S. carriers in terms of air travel.

Additionally, the Zacks Industry Rank of 66 carried by the 25-member Zacks categorized Transportation-Airline industry highlights the fact that airline stocks are very much in favor, despite certain setbacks. In fact, the favorable rank places the industry in the top 26% of the 250+ groups enlisted, which further bring in the good news for airline stocks.

Airline Stocks – A Must for Your Portfolio

Given this favorable backdrop, it is a prudent idea to add airline stocks to your portfolio for high returns. However, with the space being flooded with multiple stocks, selecting the right stocks is by no means an easy task. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

To this end, we have shortlisted five companies that flaunt a Zacks Rank of #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our Choices

Air France KLM SA (OTC:AFLYY) , based in Paris, France is our first choice. It was founded in 1919 and is engaged in passenger transportation.

The company has a year-to-date return of over 100%, much higher than the Transportation - Airline industry’s gain of 13.5%. This Zacks Rank #1 stock is expected to be up 27.1% this year, in contrast to the industry’s projected negative return of 9.9%.

Hawaiian Holdings, Inc. (NASDAQ:HA) is engaged in the scheduled air transportation of passengers and cargo between the Hawaiian Islands and certain cities in the U.S. Currently, it sports a Zacks Rank #1.

The Zacks Consensus Estimate for its current year earnings climbed 8.3% over the last 60 days to $5.20 per share. The company has yielded a solid return of 9.5% over the last three months outperforming the Transportation - Airline industry’s gain of 8.2%.

United Continental Holdings Inc (NYSE:UAL) is a holding company and its principal subsidiary is United Air Lines, Inc. This Zacks Rank #1 company transports people and cargo through its mainline operations.

The Zacks Consensus Estimate for its current year earnings moved up 6.8% over the last 60 days to $7.19 per share. The company has outperformed the industry in the last one year (78.3% versus 36.7%).

SkyWest, Inc. (NASDAQ:SKYW) operates a regional airline in the US. The company's segments include SkyWest Airlines, ExpressJet and SkyWest Leasing. The company has a Zacks Rank #2.

The Zacks Consensus Estimate for its current year earnings climbed 4.3% over the last 60 days to $3.18 per share. The company has outperformed the industry in the last one year (42.9% versus 36.7%).

Ryanair Holdings plc (NASDAQ:RYAAY) is an Irish low-fare airliner that primarily operates from Europe. The carrier sports a Zacks Rank #1.

The Zacks Consensus Estimate for its current year earnings moved up 3.2% over the last 60 days to $5.85 per share. The company has outperformed the industry on a year-to-date basis (30.7% versus13.4%).

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