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3 Airline Stocks to Watch Amid Industry Challenges
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Stocks in the Zacks Transportation - Airline industry are being hurt by the increase in fuel costs. As if the recent spike in fuel costs was not enough, the northward movement of labor costs has further compounded the airline industry’s woes.
Despite the challenges, we believe that stocks like Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) and American Airlines (AAL - Free Report) should be on an investor’s watchlist given the encouraging air travel demand trend.
About the Industry
The Zacks Airline industry houses players engaged in transporting passengers and cargo 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 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 during the pandemic, with passenger revenues taking a beating. However, air travel demand is rosy now. The focus on boosting cargo revenues is a positive too.
Factors Relevant to the Industry's Fortunes
Rosy Air Traffic Scenario: It is a well-documented fact that air travel demand has bounced back strongly from the pandemic lows. The removal of COVID-related restrictions is aiding air travel, which is now strong on the international front as well. People are again resorting to air travel as they resume their normal activities.
The upbeat forecast by the Airlines for America or A4A for the upcoming Thanksgiving travel period (Nov 17-27) further highlights the encouraging scenario. Per A4A, air travel during the Thanksgiving holiday period this year is likely to touch an all-time high. Passenger volume is expected to be nearly 30 million over the 11-day period. The forecast implies that 2.7 million passengers are likely to fly per day, a 9% increase from 2022 actuals. Per the projection, the Sunday after Thanksgiving, Nov 26, is likely to be the busiest day of the 11-day holiday period. A record 3.2 million passengers are expected to take to the skies on that day.
High Fuel Costs: The northward movement of oil price does not bode well for the bottom-line growth of industry participants. This is because fuel expenses are a significant input cost for the aviation space. Notably, oil price surged 28.5% in the July-September period due to the extension of production cut by Saudi Arabia and Russia through the end of the current year.
Uptick in Labor Costs: The increase in expenses on the labor front represents another headwind for airlines. With U.S. airlines grappling with labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
Zacks Industry Rank Signals Dull Prospects
The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 20% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates murky 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Evidently, the industry’s earnings estimate for 2023 has decreased 13.8% since February-end.
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 Lags S&P 500 and Sector
Over the past year, the Zacks Transportation - Airline industry has declined 13.3% against the S&P 500 composite’s rise of 11%. The broader sector has declined 5.7% in the said time frame.
One-Year Price Performance
Valuation Picture
The price/sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.38X compared with the S&P 500’s 3.58X. It is also below the sector’s forward-12-month P/S of 1.5X.
Over the past five years, the industry has traded as high as 1.02X, as low as 0.33X and at the median of 0.61X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Airline Stocks to Watch
All three stocks currently carry a Zacks Rank #3 (Hold).
Delta, based in Atlanta, is being well-served by the uptick in air travel demand. Riding on the buoyant air traffic scenario, Delta expects approximately 6 million passengers to avail its flights in the Nov 18-29 timeframe. The forecast implies that nearly 50,000 passengers are likely to fly per day.
DAL surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters, missing the mark in the other quarter. The average beat is 4.35%. DAL shares have gained 7.7% year to date.
Price and Consensus: DAL
United Airlines is seeing a steady recovery in domestic and international air travel demand. United Airlines expects the busiest-ever Thanksgiving travel period this year. The Sunday after Thanksgiving is expected to be the busiest in terms of air traffic. Management expects 5.9 million passengers to board its flights over the 11-day Thanksgiving travel period.
Riding on the buoyant air traffic scenario, UAL shares have gained 4.9% year to date. UAL surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters. The average beat is 16.5%.
Price and Consensus: UAL
American Airlines too is benefiting from an improvement in air travel demand. Like UAL, American Airlines expects the busiest-ever Thanksgiving travel period. Management expects more than 7.8 million passengers to avail its flights in the Nov 16-Nov 28 timeframe.
The carrier's debt-reduction efforts are impressive as well. As of Sep 30, 2023, American Airlines reduced its total debt by approximately $10.9 billion from peak levels witnessed in mid-2021. AAL surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters. The average beat is 23.8%.
Price and Consensus: AAL
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3 Airline Stocks to Watch Amid Industry Challenges
Stocks in the Zacks Transportation - Airline industry are being hurt by the increase in fuel costs. As if the recent spike in fuel costs was not enough, the northward movement of labor costs has further compounded the airline industry’s woes.
Despite the challenges, we believe that stocks like Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) and American Airlines (AAL - Free Report) should be on an investor’s watchlist given the encouraging air travel demand trend.
About the Industry
The Zacks Airline industry houses players engaged in transporting passengers and cargo 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 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 during the pandemic, with passenger revenues taking a beating. However, air travel demand is rosy now. The focus on boosting cargo revenues is a positive too.
Factors Relevant to the Industry's Fortunes
Rosy Air Traffic Scenario: It is a well-documented fact that air travel demand has bounced back strongly from the pandemic lows. The removal of COVID-related restrictions is aiding air travel, which is now strong on the international front as well. People are again resorting to air travel as they resume their normal activities.
The upbeat forecast by the Airlines for America or A4A for the upcoming Thanksgiving travel period (Nov 17-27) further highlights the encouraging scenario. Per A4A, air travel during the Thanksgiving holiday period this year is likely to touch an all-time high. Passenger volume is expected to be nearly 30 million over the 11-day period. The forecast implies that 2.7 million passengers are likely to fly per day, a 9% increase from 2022 actuals. Per the projection, the Sunday after Thanksgiving, Nov 26, is likely to be the busiest day of the 11-day holiday period. A record 3.2 million passengers are expected to take to the skies on that day.
High Fuel Costs: The northward movement of oil price does not bode well for the bottom-line growth of industry participants. This is because fuel expenses are a significant input cost for the aviation space. Notably, oil price surged 28.5% in the July-September period due to the extension of production cut by Saudi Arabia and Russia through the end of the current year.
Uptick in Labor Costs: The increase in expenses on the labor front represents another headwind for airlines. With U.S. airlines grappling with labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
Zacks Industry Rank Signals Dull Prospects
The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 20% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates murky 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Evidently, the industry’s earnings estimate for 2023 has decreased 13.8% since February-end.
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 Lags S&P 500 and Sector
Over the past year, the Zacks Transportation - Airline industry has declined 13.3% against the S&P 500 composite’s rise of 11%. The broader sector has declined 5.7% in the said time frame.
One-Year Price Performance
Valuation Picture
The price/sales (P/S) ratio is often used to value airline stocks. The industry currently has a forward 12-month P/S of 0.38X compared with the S&P 500’s 3.58X. It is also below the sector’s forward-12-month P/S of 1.5X.
Over the past five years, the industry has traded as high as 1.02X, as low as 0.33X and at the median of 0.61X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Airline Stocks to Watch
All three stocks currently carry a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Delta, based in Atlanta, is being well-served by the uptick in air travel demand. Riding on the buoyant air traffic scenario, Delta expects approximately 6 million passengers to avail its flights in the Nov 18-29 timeframe. The forecast implies that nearly 50,000 passengers are likely to fly per day.
DAL surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters, missing the mark in the other quarter. The average beat is 4.35%. DAL shares have gained 7.7% year to date.
Price and Consensus: DAL
United Airlines is seeing a steady recovery in domestic and international air travel demand. United Airlines expects the busiest-ever Thanksgiving travel period this year. The Sunday after Thanksgiving is expected to be the busiest in terms of air traffic. Management expects 5.9 million passengers to board its flights over the 11-day Thanksgiving travel period.
Riding on the buoyant air traffic scenario, UAL shares have gained 4.9% year to date. UAL surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters. The average beat is 16.5%.
Price and Consensus: UAL
American Airlines too is benefiting from an improvement in air travel demand. Like UAL, American Airlines expects the busiest-ever Thanksgiving travel period. Management expects more than 7.8 million passengers to avail its flights in the Nov 16-Nov 28 timeframe.
The carrier's debt-reduction efforts are impressive as well. As of Sep 30, 2023, American Airlines reduced its total debt by approximately $10.9 billion from peak levels witnessed in mid-2021. AAL surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters. The average beat is 23.8%.
Price and Consensus: AAL