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Airline Stock Roundup: A4A’s Bullish Winter Holiday Season View, AAL in Focus


Last week the pilot fiasco at American Airlines Group AAL was the most eye-catching event in the airline space. A scheduling error allowed its pilots to take leave during the upcoming winter holiday period. The prospect of an acute pilot shortage during the busy travel period caused panic among passengers. Some of them also contacted the company to be sure that their travel plans will not be hampered.

Alarmed by the situation, the company finally signed an agreement in principle with its pilots’ union — Allied Pilots Association (APA) — to ensure that it operates the flights during December smoothly.

On the traffic front, Delta Air Lines DAL and Hawaiian Holdings’ HA wholly owned subsidiary — Hawaiian Airlines — revealed their respective November traffic numbers in the week. Additionally, Hawaiian Airlines provided an improved outlook on operating revenue per available seat miles (a key measure for unit revenue) for the fourth-quarter as well as 2017. The carrier also revised its fourth-quarter forecast for economic fuel cost per gallon, in line with the scenario of increasing fuel prices.

Furthermore, the International Air Transport Association (“IATA”) and Airlines for America (A4A) provided forecasts for 2017 profitability and the upcoming winter holiday season (Dec 15-Jan 4), respectively.

Transportation – Airline Industry 5YR % Return

Transportation – Airline Industry 5YR % Return

(Read the last Airline Stock Roundup for Nov 29, 2017).

Recap of the Past Week’s Most Important Stories

1. In a bid to avoid flight cancellations during the busy winter travel period, American Airlines had offered pilots 150% of their normal hourly pay to operate unassigned flights. However, this measure did not find favor with the APA and it reportedly filed a grievance. According to APA, the company had violated its labor contract. The crisis was resolved over talks between the two parties, prompting APA to withdraw its protest.

Though details of the talks were not disclosed, labor costs are likely to spike further and hurt the bottom line of this Zacks Rank #3 (Hold) carrier in the fourth quarter of 2017. (Read more: Will American Airlines' Pilot Fiasco Hurt Holiday Travel?

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

2. At Delta, November consolidated traffic — measured in revenue passenger miles (RPMs) — came in at 16.15 billion, up 3.5% year over year. This upside was driven by a 3.9% increase in international RPMs. Consolidated capacity (or available seat miles/ASMs) also rose 2.9% year over year to 18.91 billion, primarily owing to 4% rise in domestic ASMs. Moreover, load factor (percentage of seats filled by passengers) improved 40 basis points to 85.4% in the month on the back of traffic growth exceeding capacity expansion. (Read more: Delta Air Lines Reports Strong November Traffic, Stock Up).

3. At Hawaiian Airlines RPMs increased 6.3% to 1.33 billion in November on a year-over-year basis. Load factor improved 10 basis points to 85.9% as traffic growth outpaced capacity expansion (6.2%) for the month. The carrier now anticipates fourth-quarter economic fuel cost per gallon between $1.80 and $1.90 (previous guidance had estimated the metric between $1.75 and $1.85). Operating unit revenue for the fourth-quarter is also anticipated to grow between 1.5% and 3.5% (previous guidance had estimated the metric to vary between down 1% to up 2%).

For 2017, the metric is estimated to grow between 5.5% and 6.5% (previous guidance had called for growth between 5% and 6%). The company also painted a bright picture for long-term growth at its investor day presentation.

4. The IATA unveiled a rosy view for carriers with respect to the profitability level for 2018. The research firm predicts global net profit of $38.4 billion for the industry. This is much higher than the 2017 profitability forecast of $34.5 billion (increased from the $31.4 billion predicted in June). The bright projection despite increased costs can be attributed to the strong demand for air travel. The bulk of the global profits in 2018 is expected from the North American region ($16.4 billion). The estimated figure is higher than $15.6 billion expected in 2017.

Global net profit margin is expected to improve marginally to 4.7% in 2018 from 4.6% estimated in 2017. The top line is projected to come in at $824 billion next year compared with $754 billion projected in the current year. Cargo revenues are forecasted to increase to $59.2 billion for 2018 (estimated revenues for 2017 are $54.5 billion).

According to the forecast, air travel growth of 6% is expected in 2018 compared with 7.5% growth in 2017. The estimated figure for 2018 is, however, above the average growth of 5.5% in the last 10-20 years. Capacity is projected to rise by 5.7% in 2018. According to the forecast, load factor (percentage of seats filled by passengers) for the next year is expected to touch record levels of 81.4% as capacity expansion is likely to outweigh traffic growth. According to the report, yields are expected to improve 3% in 2018.

The research firm has also predicted that the average net profit per departing passenger would be $8.90 per passenger in 2018 compared with $8.45 in 2017. The firm projects that jet fuel prices are likely to escalate around 12.5% to $73.8 per barrel next year. Fuel bill is likely to account for 20.5% of total costs in 2018 (18.8% in 2017).

However, labor costs are likely to be higher. They are expected to account for 30.9% of total expenses in 2018. Total unit costs in 2018 are expected to grow 4.3% (much higher than the 1.7% increase in 2017). Unit revenue growth for 2018 is projected at 3.5%.

5. According to A4A, the winter holiday season is expected to be a busy one for U.S. carriers. Moreover, the organization expects 51 million passengers to opt for air travel during the period, reflecting a 3.5% increase from the 2016 figure. The forecast reflects an increase of 80,000 passengers per day from the comparable figure last year. Passenger volumes (on a daily basis) is projected to be in the range of 2 million to 2.7 million.

Notably, the busiest days for the holiday period are expected to be Dec 21, Dec 22 and Dec 26 while the lightest travel days are projected to be Dec 16, Christmas Eve, Christmas Day and New Year’s Eve. To meet the surge in travel demand, U.S. carriers are increasing the number of available seats by 91,000 per day. The bullish forecast was backed by an improving domestic economy and affordable air fares.

6. Spirit Airlines SAVE has announced the addition of 11 new routes, starting next spring. The carrier’s move is a prudent one as it is likely to boost traffic on the new routes, thereby driving the top line. (Read more: Spirit Airlines to Offer More Flights for Spring Travel).

Price Performance

The following table shows the price movement of the major airline players over the past week and during the last 6 months.

The table shows that all airline stocks, barring GOL Linhas GOL, traded in the green in the past week, leading to the NYSE ARCA Airline Index gaining 2% to $113.91. Stocks were buoyed by the prospect of a massive corporate tax cut as the Senate cleared its version of the tax reform bill. Over the course of the last six months, the NYSE ARCA Airline Index depreciated 1.8%. Shares of Hawaiian Holdings have declined the most (24.2%) during the period due to the multiple headwinds including increased costs.

What's Next in the Airline Space?

The coming week is expected to be flooded by traffic reports from major players in the airline sector like Southwest Airlines LUV and United Continental Holdings UAL.

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