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Airline Stock Roundup: Southwest, American Airlines’ Bearish Q3 RASM View, Irma Update & More

Zacks

Last week witnessed that quite a few key airline players including the likes of United Continental Holdings UAL, Southwest Airlines Co. LUV, JetBlue Airways Corporation JBLU and American Airlines Group Inc. AAL trim their respective projections on current-quarter unit revenues. This was mainly due to weather-related disruptions and the rising fuel prices.

Notably, Irma gradually has been losing intensity and the damage caused by it has been less severe on Florida than projected. The likes of Alaska Air Group ALK and American Airlines also unveiled their respective traffic data for August during the week. Also, Delta Air Lines, Inc. DAL grabbed headlines by virtue of its expansion related update.

On the price front, the NYSE ARCA Airline Index climbed 4.7% to $108.59 over the past week as airline stocks regained strength following Irma’s loss of steam.

Transportation – Airline Industry 5YR % Return


Transportation – Airline Industry 5YR % Return

(Read the last Airline Stock Roundup for Sep 06, 2017).

Recap of the Past Week’s Most Important Stories

1. United Continental Holdings, the parent company of United Airlines, has been the worst hit as Houston is the carrier’s second-largest hub. In fact, more than 7,400 flights were cancelled at George Bush Intercontinental Airport, with operations suspended at the airport, for more than four days.

The company trimmed its views with respect to pre-tax margin and passenger revenue per available seat mile (PRASM: a key measure of unit revenue) for the current quarter mainly due to Harvey at the Cowen and Company Global Transportation Conference.

The Chicago-based carrier now expects PRASM to decline between 3% and 5% year over year (the earlier guidance provided in July had called for the metric to be in the range of +1% to -1%). In fact, Harvey has impacted the current-quarter PRASM to the tune of approximately 150 basis points. Also, the carrier anticipates pre-tax margin between 8% and 10% (previous guidance had called for the metric to be in the range of 12.5% to 14.5%). Higher fuel prices are further expected to hurt the bottom line in the third quarter (read more: Harvey Impact on Airlines: United Continental Hit the Most).

On a separate note, United Continental announced its intention to start nonstop flights operating daily between its Houston hub and Sydney from Jan 18, 2018. The service once operational, should be warmly welcomed by passengers as it broadens their options of reaching Sydney from Houston. The flight, first connecting Houston to Australia, will be the second-longest for this Zacks Rank #3 (Hold) carrier spanning 8,596 miles. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

2. Delta Air Lines will collaborate with partner Air France to introduce a nonstop trans-Atlantic service from Indianapolis to its European hub at Paris Charles de Gaulle. The service is expected to be operational from May 24, 2018. Additionally, the company will operate flights connecting Indianapolis and Paris on a Boeing 767-300ER aircraft (read more: Delta Air Lines to Initiate Indianapolis-Paris Service).

3. At Southwest Airlines, traffic (measured in revenue passenger miles) rose 5.3% in August. Load factor (the percentage of seats filled by passengers) improved 30 basis points to 84.9% in the same month as traffic growth outpaced capacity expansion (4.9%). The Dallas-based carrier, which had to call off approximately 2,800 flights due to Harvey, now expects operating revenue per available seat mile (RASM) in the range of down 1% to slightly up, on a year-over-year basis. The metric was earlier projected to increase approximately 1% from the year-ago quarter. (read more: Southwest Airlines August Traffic Up, Q3 RASM View Bearish).

4. While traffic at American Airlines improved 3.7% in August, capacity expanded 3.2%. Load factor increased 40 basis points to 86.3% as capacity expansion was outpaced by traffic growth. In fact, the company that has significant exposure to Florida including its hub at Miami International Airport had to cancel multiple flights due to Irma. The natural calamity also caused it to trim its current-quarter total revenue per available seat miles (TRASM) view.

Consequently, the key unit revenue metric is now expected to be approximately flat to up 1% year over year (the earlier guidance had called for an increase between 0.5% and 2.5%). With fuel costs on the rise, the carrier anticipates pre-tax margin (excluding special items) in the band of 8.5% to 10.5% for the third quarter compared with the previous guidance of 10% to 12%. American Airlines expects to perform better with respect to TRASM in the fourth quarter of 2017 compared with the current quarter.

5. Traffic at Alaska Air Group increased 5.8% to 4.78 billion in August. On a year-over-year basis, consolidated capacity rose 5.5% to 5.55 billion. Also, the load factor improved to 86.2% from 85.8% recorded in August 2016, as traffic growth exceeded capacity expansion (read more: Alaska Air Group Delivers Impressive August Traffic Data).

6. August traffic at Hawaiian Airlines — the wholly owned subsidiary of Hawaiian Holdings HA — inched up 1% while capacity shrunk 1.1%. Load factor increased 180 basis points to 86.2% in the same month as traffic expanded and capacity contracted (read more: Hawaiian Holdings Arm Posts Impressive August Traffic Data).

Performance

The following table shows the price movement of the major airline players over the past week and during the last six months.

Company

Past Week

Last 6 months

HA

-3.8%

-18.9%

UAL

4%

-12.3%

GOL

-0.1%

46.9%

DAL

8%

3.6%

JBLU

4.3%

-1.3%

AAL

4.2%

9.3%

SAVE

7.5%

-31.9%

LUV

6.3%

-1%

CPA

3.4%

24.3%

ALK

6.2%

-21%

The table above shows that most airline stocks traded in the green in the past week leading to the NYSE ARCA Airline Index’s significant gain. Over the last six months, the sector tracker gained 1.1% on the back of impressive gains at Latin American carriers, GOL Linhas and Copa Holdings.

What's Next in the Airline Space?

Apart from some August traffic reports, investors may look forward to updates on the approaching Hurricane Jose and its impact (if any) on airlines.

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