Near-Term Outlook Appears Enthralling For Airline Stocks

The companies housed in the Zacks Airline industry focus on the transportation of passengers and cargo to various destinations across the globe. Most operators maintain a fleet of mainline jets apart from regional planes. They operate with the help of their regional airline subsidiaries and third-party regional carriers. The industry participants utilize their respective cargo divisions to provide a wide range of freight and mail services.

The space includes legacy carriers like Delta Air Lines (NYSE:DAL) (DAL), low-cost players like Southwest Airlines (NYSE:LUV) (LUV) and regional operators like SkyWest (SKYW). The low-cost segment also includes ultra-low-cost carriers like Spirit Airlines (SAVE).

Let’s take a look at the industry’s three major themes:

• Participants in the airline industry are benefiting from robust demand for travel despite headwinds like the Sino-U.S. trade tensions. Affordable air ticket prices have contributed to this bullish scenario with respect to travel demand. As an evidence, a record number of people took to the skies during the Thanksgiving travel period. Moreover, according to International Air Transport Association (“IATA”), in the first 10 months of 2019, global travel demand (measured in revenue passenger kilometers) increased 4.3% year over year. Riding on strong demand for air travel, load factor (percentage of seats filled by passengers) increased 50 basis points to 82.8% in the January-October period.

• It is a well-known fact that fuel prices represent substantial input cost for any airline company. Airlines have been well served in this regard as oil prices have declined approximately 10% over the past six months, mainly owing to the restoration of production capabilities of crude, following the drone attack on Saudi Arabia’s oil facilities in mid-September. In fact, this drop in oil prices supported bottom-line growth in the third quarter of 2019. Airline heavyweights like American Airlines (NASDAQ:AAL) (AAL) and United Airlines (UAL) reported year-over-year growth in third-quarter earnings due to low fuel costs. Additionally, the strong financial position of most airlines bode well. Given their solid financial health, investor-oriented activities like dividend payouts are also prevalent in the airline space. In fact, key airline players like Delta Air Lines and Alaska Air Group (ALK) have hiked their quarterly dividends this year. It won’t be a surprise if more shareholder-friendly announcements are made by airlines in the near term.

• The extended grounding period of Boeing (NYSE:BA) 737 Max jets has been hurting carriers with such jets in their fleet. As an evidence, United Airlines which has stated that the 14 Boeing 737 Max jets in its fleet will remain grounded until Mar 4, 2020, expects to cancel nearly 3,468 flights in 2020 in addition to the multiple flights already cancelled so far this year due to the adversity. Moreover, owing to the MAX groundings, non-fuel unit costs are rising, which in turn, are limiting bottom-line growth. Southwest Airlines, which has 34 such jets in its fleet, expects current-quarter non-fuel unit costs (excluding fuel and oil expense, and profit-sharing expense) to increase 4-6% year over year.

Zacks Industry Rank Indicates Sunny Outlook

The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since the end of June 2019, the industry’s earnings estimate for the current year has increased 2.3%.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Airline industry has underperformed the broader Zacks Transportation Sector and the Zacks S&P 500 composite over the past year.

The industry has gained 3.9% over this period compared with the S&P 500 and the broader sector’s increase of 18.4% and 6.8%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12- month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing airline stocks, the industry is currently trading at 6.56X compared to the S&P 500’s 11.55X. It is also below the sector’s trailing-12-month EV/EBITDA of 7.75X.

Over the past five years, the industry has traded as high as 12.12X, as low as 4.32X and at the median of 6.06X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Bottom Line

Despite headwinds like U.S.-China trade tensions and issues related to the grounding of Boeing 737 Max jets, the near-term prospects of the airline industry appear rosy courtesy of an uptick in passenger revenues on the back of robust demand for air travel. Low oil prices also bode well for airline stocks.

Here, we present three stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Deutsche Lufthansa (DE:LHAG) Aktiengesellschaft (DLAKY) functions as an aviation company in Germany as well as internationally. The stock, sporting a Zacks Rank #1, saw the Zacks Consensus Estimate for current-year earnings being revised 17.2% upward over the past 60 days.

Price and Consensus: DLAKY

Allegiant Travel Company (ALGT), based in Las Vegas, NV, operates a low-cost passenger airline through its subsidiary Allegiant Air LLC and sports a Zacks Rank #1. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 4.6% upward over the past 60 days. The stock’s expected earnings growth rate for the current year is 44.4.

Price and Consensus: ALGT

Ryanair Holdings (RYAAY) provides scheduled-passenger airline services. This European low-cost carrier currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 7.1% in the past 60 days.

Price and Consensus: RYAAY

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