The easing of coronavirus-related restrictions spurred air-travel demand hugely. This is a huge positive for the Zacks Airline industry. The uptick in air traffic is likely to boost the top-line performance of airlines in the September quarter. Airline players like Delta Air Lines (DAL Quick QuoteDAL - Free Report) , United Airlines (UAL Quick QuoteUAL - Free Report) and JetBlue Airways (JBLU Quick QuoteJBLU - Free Report) are likely to benefit from robust demand for air-travel.

However, the sharp rise in fuel costs does not bode well for airlines, as expenses on this front are significant for players in this industry. The uptick in this key input cost limits bottom-line growth of the aviation stocks. The labor crunch is another headwind.

Industry Overview

The Zacks Airline industry houses players engaged in transporting passengers and cargoes to various destinations, globally. Most operators maintain a fleet of multiple mainline jets in addition to several regional planes. Operations are aided by their regional airline subsidiaries and third-party regional carriers. Additionally, industry players utilize their respective cargo divisions to offer a wide range of freight and mail services. The players invest substantially to upgrade technology. The industry, apart from comprising legacy carriers, includes low-cost players. The well-being of the companies in this group is linked to the health of the overall economy. For example, the aviation space was one of the worst-hit corners by the pandemic with passenger revenues taking a severe beating. The subsequent focus on boosting cargo revenues is a positive.

Key Themes Governing the Airline Industry

Uptick in Air-Travel Demand Bodes Well: Air-travel demand, particularly for leisure, is very strong and aiding the top line of airlines. The strong air traffic generated during the Labor Day holiday period is likely to boost the top-line performance of airlines in the September quarter. Owing to strong air traffic, United Airlines upped its revenue growth view for the third quarter of 2022. UAL now anticipates total operating revenues to grow 12% from the September quarter’s level of 2019, higher than the prior expected growth rate of 11%

Bottom-Line to Suffer Oil Price Increase: The current upsurge in oil price does not augur well for any airline stocks as far as its bottom-line growth is concerned as the uptick in fuel costs implies an increase in operating expenses. Notably, oil prices escalated 48% in first-half 2022, induced by the Russia-Ukraine war. JetBlue Airways increased its third-quarter projection for fuel cost per gallon by 18 cents to $3.86 as oil price moves north.

Staffing Shortage a Bane: The airline industry in the United States is being plagued by tensions on the labor front. With airlines trimming their labor force substantially during the peak of the pandemic, the industry is grappling with staffing crunch as demand bounces back. Most airlines are facing pilot protests, demanding higher pay and better work conditions to abate the fatigue stemming from excessive workload following insufficient hands. Due to labor scarcity, many U.S. airlines trimmed their capacity this summer, which in turn, is likely to drain profitability. Reduced capacity is pushing up non-fuel unit costs. United Airlines expects consolidated unit cost or cost per available seat mile (CASM), excluding fuel, third-party business expenses, profit-sharing and special charges, to increase roughly 16% in the September quarter from the corresponding 2019 levels.

Focus on Cargo Revenues an Upside: With passenger revenues bouncing back from the pandemic lows, the simultaneous focus of airlines on their cargo units is likely to boost the top line further. For example, in the June quarter, cargo revenues surged 86% year over year at Delta. This was the best-ever performance of the cargo unit in the second quarter of a year.

Per an IATA report, cargo revenues are likely to account for $191 billion of the industry revenues in 2022. The projected figure is nearly double the $100 billion recorded in 2019. Overall, airlines are expected to carry more than 68 million tonnes of cargo in the current year. The estimated figure is a record high.

Zacks Industry Rank Indicates Sunny Prospects

The Zacks Airline industry is a 29-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #84, which places it in the top 34% of 250 plus Zacks industries.

The group’s Zacks Industry Rank, 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 a positive earnings outlook for the constituent companies in aggregate.

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

Industry Underperforms S&P 500 and Sector

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

The industry has declined 33.5% over this period compared with the S&P 500’s depreciation of 12.6% and the broader sector’s decrease of 11.9%.

One-Year Price Performance

The Valuation Picture

The Price/Sales (P/S) ratio is often used to value the airline stocks. The industry currently has a forward 12-month P/S of 0.38X compared with the S&P 500’s 3.38X. It is also below the sector’s forward-12-month P/S of 1.55X.

Over the past five years, the industry has traded as high as 1.01X, as low as 0.37X and at the median of 0.69X.

Forward 12-Month Price-to-Sales Ratio (Past Five Years)

3 Transportation - Airline Stocks to Keep Tabs on

Delta has a market capitalization of $21.12 billion, presently. DAL, based in Atlanta, GA, is being bolstered by the uptick in demand for air travel (particularly for leisure). DAL expects the September quarter's revenues to increase in the 1-5% band. High fuel costs are, however, a bane. 

Delta’s earnings outshined the Zacks Consensus Estimate in three of the last four quarters (missing the mark in the remaining one). The average beat is 33.7%. DAL carries a Zacks Rank #3 (Hold), currently.

 You can see the complete list of today’s Zacks #1 Rank stocks here  

 

Price and Consensus: DAL

 

United Airlines has a market capitalization of $12.65 billion, presently. On the back of upbeat air-travel demand, UAL witnessed profitability in the second quarter of 2022 and expects to see the same in the third quarter as well. UAL forecasts the average aircraft fuel price per gallon to be $3.83 in the third quarter, much higher than the reported figure in third-quarter 2021. This is, however, a worry.

Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved 38.7% north at UAL. United Airlines carries a Zacks Rank of 3, currently.

Price and Consensus: UAL

JetBlue has a market capitalization of $2.6 billion, presently. Management recently raised its previous view for third-quarter 2022 air traffic as it continues to see strong air-travel demand even after the peak of summer has passed. Revenue per available seat mile (RPMs: a measure of air traffic) for the September quarter is expected to increase in the 22-24% band from the third-quarter 2019 actuals (earlier guidance: rise in the 19-23% range).

Over the past 60 days, the Zacks Consensus Estimate for current-quarter earnings has moved 17.7% north at JBLU. JetBlue is currently Zacks #3 Ranked.

Price and Consensus: JBLU