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3 Airline Stocks to Monitor Closely Despite Industry Headwinds
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Prospects of the Zacks Transportation - Airline industry are dented by high labor costs. Moreover, production delays at Boeing (BA - Free Report) are hurting the fleet-related plans of airlines in the United States. Weak pricing power also remains an overhang.
However, upbeat passenger volumes are a tailwind for the industry. As a result, we believe that investors interested in the industry would do well to keep stocks like Copa Holdings (CPA - Free Report) , SkyWest (SKYW - Free Report) and JetBlue Airways (JBLU - Free Report) on their radar.
About the Industry
The Zacks Airline industry players are 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. Their operations are aided by 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 pandemic-hit corners, with passenger revenues taking a beating. However, air travel demand is extremely rosy now. The focus on boosting cargo revenues is a positive, too.
Factors Relevant to the Industry's Fortunes
Boeing-Led Woes a Major Headwind: Jet delivery delays from Boeing have led to airlines cutting expectations for plane deliveries. United Airlines (UAL - Free Report) management has trimmed its current-year guidance pertaining to capital expenditures. The company now expects full-year 2024 total capital expenditures to be less than $6.5 billion, down from $9 billion expected earlier. Chicago-based UAL, with 79 Boeing Max 9 planes in its fleet, is the largest operator of such jets across the globe.
Pricing Woes: On its second-quarter 2024 conference call, United Airlines management stated that the practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive. Pricing issues have led to major airlines unveiling subdued earnings views for third-quarter 2024.
Uptick in Labor Costs: The increase in expenses on the labor front represents another challenge for airlines. With U.S. airlines grappling with a labor shortage in the post-COVID 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. For example, at United Airlines consolidated cost per available seat mile, excluding fuel, third-party business expenses, profit-sharing and special charges, increased 2.1% year over year in second-quarter 2024.
Upbeat Passenger Volumes a Tailwind: As air travel demand remains strong, airlines’ top-line performance has been impressive. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. As an example, driven by upbeat air travel demand, UAL’s top line increased 5.7% year over year in the second quarter of 2024. This was driven by a 5.2% rise in passenger revenues
Zacks Industry Rank Signals Dull Prospects
The Zacks Airline industry is a 30-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #221, which places it in the bottom 12% 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 outperform 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 pessimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2024 has declined 15% since February.
Before we present a few stocks that you may want to add or retain in your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture
Industry Surpasses Sector but Underperforms S&P 500
Over the past year, the Zacks Transportation - Airline industry has gained 7.5% compared with the S&P 500 composite’s rise of 22.7%. The broader sector has declined 1.1% 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 0.99X compared with the S&P 500’s 5.22X. It is also below the sector’s forward-12-month P/S of 1.88X.
Over the past five years, the industry has traded as high as 1.01X, as low as 0.40X and at the median of 0.66X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Airline Stocks to Watch
SkyWest is based in St. George, UT. SkyWest's fleet modernization efforts are commendable. By 2026-end, SkyWest is likely to operate a total of 258 E175 aircraft. We are impressed by SKYW's efforts to reward its shareholders through buybacks. Upbeat passenger volumes also bode well.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 0.3% upward. SKYW currently sports a Zacks Rank #1 (Strong Buy). SKYW shares have gained 65.2% year to date.
Latin American carrier Copa Holdings is being aided by upbeat air travel demand. We are also encouraged by Copa Holdings' initiatives to modernize its fleet.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 1.2% upward. CPA currently carries a Zacks Rank #3 (Hold).
Price and Consensus: CPA
JetBlue is based in Long Island City, New York. We are impressed by the company's efforts to modernize its fleet. Efforts to reduce debt load also bode well. However, high labor costs are hurting the bottom line.
JetBlue surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in one, the average beat being 4.8%. JBLU currently carries a Zacks Rank #3.
Price and Consensus: JBLU
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3 Airline Stocks to Monitor Closely Despite Industry Headwinds
Prospects of the Zacks Transportation - Airline industry are dented by high labor costs. Moreover, production delays at Boeing (BA - Free Report) are hurting the fleet-related plans of airlines in the United States. Weak pricing power also remains an overhang.
However, upbeat passenger volumes are a tailwind for the industry. As a result, we believe that investors interested in the industry would do well to keep stocks like Copa Holdings (CPA - Free Report) , SkyWest (SKYW - Free Report) and JetBlue Airways (JBLU - Free Report) on their radar.
About the Industry
The Zacks Airline industry players are 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. Their operations are aided by 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 pandemic-hit corners, with passenger revenues taking a beating. However, air travel demand is extremely rosy now. The focus on boosting cargo revenues is a positive, too.
Factors Relevant to the Industry's Fortunes
Boeing-Led Woes a Major Headwind: Jet delivery delays from Boeing have led to airlines cutting expectations for plane deliveries. United Airlines (UAL - Free Report) management has trimmed its current-year guidance pertaining to capital expenditures. The company now expects full-year 2024 total capital expenditures to be less than $6.5 billion, down from $9 billion expected earlier. Chicago-based UAL, with 79 Boeing Max 9 planes in its fleet, is the largest operator of such jets across the globe.
Pricing Woes: On its second-quarter 2024 conference call, United Airlines management stated that the practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive. Pricing issues have led to major airlines unveiling subdued earnings views for third-quarter 2024.
Uptick in Labor Costs: The increase in expenses on the labor front represents another challenge for airlines. With U.S. airlines grappling with a labor shortage in the post-COVID 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. For example, at United Airlines consolidated cost per available seat mile, excluding fuel, third-party business expenses, profit-sharing and special charges, increased 2.1% year over year in second-quarter 2024.
Upbeat Passenger Volumes a Tailwind: As air travel demand remains strong, airlines’ top-line performance has been impressive. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. As an example, driven by upbeat air travel demand, UAL’s top line increased 5.7% year over year in the second quarter of 2024. This was driven by a 5.2% rise in passenger revenues
Zacks Industry Rank Signals Dull Prospects
The Zacks Airline industry is a 30-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #221, which places it in the bottom 12% 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 outperform 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 pessimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2024 has declined 15% since February.
Before we present a few stocks that you may want to add or retain in your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture
Industry Surpasses Sector but Underperforms S&P 500
Over the past year, the Zacks Transportation - Airline industry has gained 7.5% compared with the S&P 500 composite’s rise of 22.7%. The broader sector has declined 1.1% 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 0.99X compared with the S&P 500’s 5.22X. It is also below the sector’s forward-12-month P/S of 1.88X.
Over the past five years, the industry has traded as high as 1.01X, as low as 0.40X and at the median of 0.66X.
Forward 12-Month Price-to-Sales Ratio (Past Five Years)
3 Airline Stocks to Watch
SkyWest is based in St. George, UT. SkyWest's fleet modernization efforts are commendable. By 2026-end, SkyWest is likely to operate a total of 258 E175 aircraft. We are impressed by SKYW's efforts to reward its shareholders through buybacks. Upbeat passenger volumes also bode well.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 0.3% upward. SKYW currently sports a Zacks Rank #1 (Strong Buy). SKYW shares have gained 65.2% year to date.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SKYW
Latin American carrier Copa Holdings is being aided by upbeat air travel demand. We are also encouraged by Copa Holdings' initiatives to modernize its fleet.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 1.2% upward. CPA currently carries a Zacks Rank #3 (Hold).
Price and Consensus: CPA
JetBlue is based in Long Island City, New York. We are impressed by the company's efforts to modernize its fleet. Efforts to reduce debt load also bode well. However, high labor costs are hurting the bottom line.
JetBlue surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in one, the average beat being 4.8%. JBLU currently carries a Zacks Rank #3.
Price and Consensus: JBLU