Zacks Industry Outlook Highlights: United Continental, American Airlines Group, Hawaiian Holdings, Delta Air Lines And Southwest Airlines

For Immediate Release

Chicago, IL – June 15, 2017 – Today, Zacks Equity Research discusses the Industry: Airlines, Part 3, including United Continental (NYSE:UAL – Free Report ), American Airlines Group (NASDAQ: AAL – Free Report ), Hawaiian Holdings (NASDAQ: HA – Free Report ), Delta Air Lines (NYSE:DAL) (NYSE: DAL – Free Report ) and Southwest Airlines (NYSE: LUV – Free Report ).

Industry: Airlines, Part 3

Link: https://www.zacks.com/commentary/117746/will-these-headwinds-overrun-airlines

It is a well-established fact that some of the headwinds like declining unit revenues and depressed airfares, which had hit airlines in the last few years, are on the mend. Despite this optimism, one must be mindful of certain factors still hurting stocks in the space before investing in the sector. Let’s delve into the details.

High Costs Distorted Q1 Earnings Picture

With labor deals in vogue in the aviation space, labor costs have been on the rise. In the recently concluded Q1 earnings season, growth on the bottom-line front was hardly visible for airlines due to high costs. For example, Q1 earnings at Delta Air Lines (NYSE: DAL – Free Report ) contracted 41.7% on a year-over-year basis due to higher costs. At Southwest Airlines (NYSE: LUV – Free Report ), the bottom line declined 30.7% year over year.

Apart from this, fuel costs increased and resulted in bottom-line contraction. For example, at American Airlines Group (NASDAQ: AAL – Free Report ), total operating expenses climbed 11.4% year over year to $9 billion primarily due to the rise in fuel costs.

In fact, American Airlines’ shares fell on Apr 27, despite better-than-expected earnings and revenues in Q1, due to its announcement to hike wages of its pilots and flight attendants to match industry-leading standards. As a result, American Airlines is likely to see an increase of approximately $230 million in salary and benefit expenses in 2017, and $350 million in each of the following two years.

Repetition Likely in Q2

Increased costs are expected to hurt the bottom line of carriers in the second quarter too. United Continental Holdings (NYSE: UAL – Free Report ) expects unit costs to increase in the band of 4–5% from higher labor costs.

United Continental carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here .

Hawaiian Holdings (NASDAQ: HA – Free Report ) expects cost per available seat mile (CASM), excluding fuel and special items, to increase in the band of 4.5% to 7.5%, mainly due to the sixty-three month pay-related deal cleared by its pilots in Mar 2017. Fuel cost per gallon is expected in the band of $1.60 to $1.70, which is higher than $1.55 recorded in the second quarter of 2016.

Higher Costs to Hurt Bottom Line

The International Air Transport Association (IATA) expects 2017 global net profit for the industry to decline 9.8% year over year to $31.4 billion . 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 U.S. aviation space inking labor deals, it is of little surprise that labor costs are surging. IATA expects unit labor costs to increase 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.

Customer-Related Issues

The passenger-dragging incident at United Airlines, the wholly owned subsidiary of United Continental, on Apr 9, drew flak from across the globe, resulting in multiple apologies from the company.

As a fallout of the incident, United Airlines’ CEO Oscar Munoz is now no longer guaranteed to be the company’s chairman in 2018.

Another legacy carrier, American Airlines, also found itself in the middle of a passenger fiasco a few days later. Reportedly , a female passenger on one of American Airlines flights was seen crying in a video, uploaded on social media by a fellow passenger, following an ugly altercation with one of the flight attendants. The attendant reportedly hit her with her baby’s stroller. The female passenger was subsequently escorted off the flight. The errant male flight attendant was “removed from duty.”

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