U.S. Carriers Fly High On Upbeat Passenger Revenues: 3 Picks

Concerns related to a trade squabble with China and tensions with Iran have not deterred the U.S. economy from maintaining its good health. As an evidence, the three major stock indexes — the Dow, S&P 500 and Nasdaq Composite — remain in positive territory on a year-to-date basis.

The bullish May readings on unemployment and consumer confidence further highlight the strength of the economy.

Given this rosy picture, it is no surprise that the U.S. airline industry is in good shape with stocks in the space benefiting from strong demand for air travel. Affordable air fares, along with a much-improved job market and rising disposable income, have provided consumers an added incentive to opt for air travel. Demand for air travel has further picked up as the summer season is ongoing. Additional traffic during the busy period has boosted passenger revenues thereby bolstering the top lines of carriers. This is because passenger revenues account for the bulk of top line of most airline companies.

Bullish Unit Revenue Projections for Q2 Earnings Season

We expect airline stocks to perform well in the upcoming second-quarter earnings season driven by strong passenger revenues. Highlighting the upbeat top-line scenario, key airline players like Southwest Airlines (NYSE:LUV) , Alaska Air Group (NYSE:ALK) and JetBlue Airways (NASDAQ:JBLU) recently provided rosy second-quarter projections on revenue per available seat miles (RASM: a key measure of unit revenue).

For the soon-to-be- reported quarter, Southwest Airlines anticipates RASM to increase 6.5-7.5% year over year compared with 5.5-7.5% expected earlier. Strong demand for air travel and anticipation of impressive passenger yields led to the improved view.

Alaska Air Group now anticipates second-quarter RASM in the range of 13.26-13.45 cents, representing an approximate rise of 3.5-5% year over year. Previously, RASM was anticipated to increase in the 2-5% band. JetBlue anticipates the metric to increase between 2% and 4% year over year in the second quarter. Previously, the metric was projected to rise 1-4%. Placement of Easter/Passover holiday in April is expected to boost the metric.

The fact that demand for air travel is strong as can be envisioned from stellar performances of most carriers in the Memorial Day weekend in May. For example, Delta Air Lines (NYSE:DAL) was responsible for flying more than 2.1 million passengers without a single mainline cancellation in the May 24- 27 period. In fact, a record 666,769 passengers took to Delta flights on May 24. Second-quarter results are likely to be boosted by the surge in traffic during the above period as well.

In fact, the picture for carriers in the region is bullish not only for the second quarter but entire 2019. This is highlighted by the International Air Transport Association’s (“IATA”) upbeat projection on current-year profitability for North American carriers. The metric for these carriers is anticipated to be $15 billion for 2019 (up from $14.5 billion in 2018).

Zacks Industry Rank Portrays Sunny Outlook

With passenger revenues expected to remain strong due to upbeat demand, it is no wonder that the near-term prospects of the Zacks Airline industry appear bright as indicated by the Industry Rank. The industry currently carries a Zacks Industry Rank #90, which places it in the top 35% of more than 250 Zacks industries. 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.

In view of the enthusiasm surrounding airline stocks, as pin-pointed in the write up, it makes sense to invest in stocks from the space. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select the winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #2 (Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SkyWest (NASDAQ:SKYW) , through its subsidiaries, operates a regional airline in the United States. SkyWest is based in St. George, UT. The Zacks Consensus Estimate for current-year earnings has been revised 2.5% upward in the last 60 days.

United Continental Holdings (NASDAQ:UAL) , based in Chicago, operates an average of nearly 5,000 flights a day to multiple destinations. The Zacks Consensus Estimate for current-year earnings has been revised 0.3% upward in the last 60 days.

Hawaiian Holdings (NASDAQ:HA) , the parent of Hawaiian Airlines, is headquartered in Honolulu County, HI. The company offers non-stop service to Hawaii from 11 gateway cities of the United States. The Zacks Consensus Estimate for current-year earnings has been revised 0.8% upward in the last 60 days.

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