3 Airline Stocks to Watch out for Despite Industry Headwinds

·9 min read

The Zacks Airline industry continues to be hurt by the coronavirus pandemic. Due to the pandemic-induced passenger revenue weakness, most airline companies suffered losses in the first-quarter 2021 earnings season.

Although air-travel demand is showing signs of recovery, it is way below the pre-pandemic levels. With economic activities picking up the pace coupled with increasing vaccine rollouts, things now seem rosier for the airline stocks than last-year levels as air-travel demand (particularly for leisure) gains momentum. This bodes well for carriers like Southwest Airlines (LUV), American Airlines (AAL) and Allegiant Travel Company (ALGT).

Industry Description

The Zacks Airline industry houses companies engaged in transport of passengers and cargo to various destinations, globally. Most operators maintain a fleet comprising 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 for offering a wide range of freight and mail services.

Key Themes Governing the Airline Industry

Uptick in Air-Travel Demand Augurs Well: Even though most airlines incurred losses in the March quarter akin to the four quarters of the coronavirus-ravaged 2020, in most cases, the metric compared favorably with either the sequential quarter or the Zacks Consensus Estimate for the said quarter. For example, American Airlines’ first-quarter loss (on an adjusted basis) of $4.32 per share was narrower than the Zacks Consensus Estimate of a loss of $4.35.

Similarly, Alaska Air Group’s (ALK) loss (excluding $2.46 from non-recurring items) of $3.51 per share was narrower than the Zacks Consensus Estimate of a loss of $3.71. The sequential improvement in passenger revenues was the primary reason for this outperformance. Evidently, Delta Air Lines’ (DAL) March-quarter passenger revenues of $2,748 million bettered the December quarter’s reading by almost 2%. The scenario also looks brighter for the U.S. airlines with summer around the corner. Driven by an enhanced air-travel scenario, many U.S. carriers announced plans to broaden their networks to include their favorite tourist spots. This leads to an anticipation of demand hike during the upcoming months.

Expecting the current bullish scenario to continue, some airlines issued encouraging outlooks while releasing their first-quarter results. Per Delta’s CEO Ed Bastian, “If recovery trends hold, we expect positive cash generation for the June quarter and see a path to return to profitability in the September quarter as the demand recovery progresses." Moreover, JetBlue Airways (JBLU) expects to reach a break-even point in the third quarter of 2021 on an EBITDA basis.

Focus on Cargo Revenues Another Positive: With passenger revenues still lagging the pre-pandemic levels, most airlines are targeting cargo revenues to shore up their top lines. Evidently, at United Airlines (UAL) cargo revenues surged 88.3% year over year to $497 in the March quarter. At American Airlines, the same soared in excess of 100%. Notably, the International Air Transport Association (IATA) expects 2021 cargo revenues to increase to $152 billion from $128 billion and $101 billion in 2020 and 2019, respectively.

Capacity Cuts Pushing Up Non-Fuel Unit Costs: With air-travel demand well below the pre-pandemic levels, airline companies are trimming capacity. Evidently, available seat miles (a measure of capacity) slumped 50.2% in the first quarter of 2021 at United Airlines amid massive capacity contractions. As a result, non-fuel unit costs or cost per available seat mile excluding fuel, third-party business expenses, profit-sharing and special charges are escalating. Notably, the metric flared up 43.8% at United Airlines as of March end. The IATA expects capacity reduction to the tune of 47.2% in 2021 from the 2019 levels.

Higher Oil Prices to Hurt Bottom Line: The increase in fuel price per gallon (up 22% in the January-March period) is not a welcoming development for the airlines as far as their bottom lines are concerned. This is because fuel expenses represent one of the largest input costs for the airlines.

With the resumption of economic activities, fuel costs are on the rise. Notably, per IATA, Jet kerosene price is expected to be $68.9/barrel in 2021 (on average), representing a huge increase from the 2020 reading of $46.6 per barrel.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. It currently carries a Zacks Industry Rank #211, which places it in the bottom 17% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 position 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. As a proof, the industry’s loss estimate for 2021 has widened to $3.46 per share from 88 cents at 2020 end.

Industry Outperforms Sector & S&P 500

Driven by the betterment in air-travel demand, the Zacks Airline industry has outperformed the broader Zacks Transportation sector as well as the Zacks S&P 500 composite over the past year.

The industry has skyrocketed 107.9% over this period compared with the broader sector’s increase of 70.2%. The S&P 500 has also grown 46.6%.

One-Year Price Performance

Industry’s Current Valuation

Price/Sales (P/S) ratio is often used for valuing airline stocks. The industry currently has a forward 12-month P/S of 0.97X compared with the S&P 500’s 4.77X. It is also below the sector’s forward-12-month P/S of 1.81X.

Over the past five years, the industry has traded as high as 1.05X, as low as 0.37X and at the median of 0.72X.

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

3 Airline Stocks to Keep an Eye on

Southwest Airlines: This Dallas-based low-cost carrier currently carries a Zacks Rank #3 (Hold). Owing to the recent improvement in air-travel demand, Southwest Airlines’ first-quarter passenger revenues of $1,712 million improved 2.9%, sequentially. Moreover, the airline incurred a narrower-than-expected loss per share in the March quarter. Additionally, management estimates average core cash flow to either break even or turn positive by June.

The company is also looking to cut costs to partly offset the revenue weakness. Evidently, total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expenses) dropped 19.1% year over year in the March quarter. Notably, shares of Southwest Airlines have gained 20.5% in the past three months, driven by the rise in leisure passenger demand and impressive booking trends. The Zacks Consensus Estimate for second-quarter 2021 bottom line is pegged at a loss of 60 cents, narrowed from a loss of 81 cents, 30 days ago.

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

Price and Consensus: LUV

American Airlines: This Fort Worth, TX-based company operates flights to multiple destinations across the globe. The company, like most other airline operators, is witnessing a revival in passenger revenues on a spike in air-travel demand. Moreover, the company’s cost-control initiatives are aimed at driving the bottom line despite the prevalent challenging scenario. Boosted by its cost-saving efforts, American Airlines succeeded in reducing its daily cash burn rate from nearly $100 million in April 2020 to approximately $27 million in the first quarter of 2021.

The company currently carries a Zacks Rank of 3. The stock has rallied 26% in the past three months, mainly owing to the rise in bookings. Reflective of this upside, American Airlines’ seven-day moving average as of Mar 26 with respect to the net bookings was roughly 90% of the level recorded in 2019. Moreover, the reading related to domestic load factor (% of seats filled by passengers) was nearly 80% in the first quarter, further mirroring the recovery in air-travel demand. Management anticipates booking strength to continue through the second-quarter 2021 end.

Price and Consensus: AAL

Allegiant Travel Company, headquartered in Las Vegas, NV, is currently Zacks #3 Ranked. The recent improvement in leisure air-travel demand in the United States is providing a boost to Allegiant’s passenger revenues, which account for bulk of the top line. Evidently, Allegiant’s passenger revenues improved 14.2% sequentially in the first quarter of 2021.

Owing to upbeat air-travel demand in the United States, the carrier expects capacity (measured in available seat miles or ASMs) in second-quarter 2021 to expand from the number reported in second-quarter 2019. For the second quarter, ASM (for scheduled service as well as total system) is expected to increase between 2% and 6% from the second-quarter 2019 reported figure.

Like most other U.S.-based airline companies, increasing air-travel demand in the United States perked up the Allegiant stock price, which has appreciated 6.3% over the past three months. The Zacks Consensus Estimate for second-quarter earnings per share has been revised above 100% upward to $2.26 over the past 30 days.

Price and Consensus: ALGT

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United Airlines Holdings Inc (UAL) : Free Stock Analysis Report

Southwest Airlines Co. (LUV) : Free Stock Analysis Report

Delta Air Lines, Inc. (DAL): Free Stock Analysis Report

Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report

Allegiant Travel Company (ALGT) : Free Stock Analysis Report

American Airlines Group Inc. (AAL) : Free Stock Analysis Report

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