With air travel demand bouncing back strongly from the pandemic lows, prospects of stocks in the Zacks Transportation – Airline industry appear bright indeed. It is well documented that air travel demand is particularly strong on the leisure front. What is more encouraging is that international demand made a roaring comeback.The decline in fuel expenses represents another tailwind for the industry.
Driven by the abovementioned positives, investors interested in the industry would do well to keep stocks like Ryanair Holdings RYAAY, United Airlines UAL and American Airlines AAL 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 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 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
Rosy Air Traffic Scenario: The stronger-than-expected recovery in air travel demand from pandemic lows is a huge positive for the industry, which was one of the worst hit in the peak COVID-19 period. The removal of COVID-related restrictions is aiding air travel, which is now strong on the international front as well. Reflecting the recovery in air travel demand, overall global traffic was up 47.2% in the first half compared with the year-ago period, with double-digit increases on both the domestic and international fronts, per IATA.
People are again resorting to air travel as they resume their normal activities. Expecting the strong passenger volumes to continue, some airline companies like United Airlines have lifted their earnings per share view for the current year.
Declining Fuel Costs: The southward movement of oil price bodes 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 declined 6.6% in the April-June period of 2023. Per IATA, the average jet fuel cost is expected to be $98.5 per barrel in 2023 (earlier forecast was $111.9 per barrel).
High Labor Costs: Increased operating costs are limiting bottom-line growth. With expenses on fuel moving south, costs will likely continue to be steep going forward due to escalated labor costs. Moreover, as U.S. airlines grapple with pilot shortage, the bargaining power of this labor group has increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs. American Airlines recently lifted its forecast for third-quarter non-fuel unit costs due to the four-year pay-related deal with pilots.
Zacks Industry Rank Signals Bright Prospects
The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #74, which places it in the top 29% 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2023 has moved up 27.3% since March 2023.
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 Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation – Airline industry has gained 5.8% compared with the S&P 500 composite’s rise of 6%. The broader sector has declined 3.4% in the said time frame.
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 0.44X compared with the S&P 500’s 3.71X. It is also below the sector’s forward-12-month P/S of 1.62X.
Over the past five years, the industry has traded as high as 1.02X, as low as 0.33X and at the median of 0.64X.
3 Stocks to Keep a Tab on
Ryanair Holdings’ growth prospects are being supported by an upbeat air travel demand scenario. Upbeat passenger volumes are leading to the company posting impressive traffic numbers over the past few months.
Measures to expand its fleet to cater to the rising travel demand are encouraging as well. Riding on the buoyant air-traffic scenario, RYAAY shares have gained 31% year to date. RYAAY surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters by 21.4%. Ryanair currently sports a Zacks Rank #1 (Strong Buy).
United Airlines is seeing steady recovery in domestic and international air travel demand. Driven by the rosy air travel demand scenario, UAL expects third-quarter earnings per share in the $3.85-$4.35 band. Management has lifted its earnings forecast for 2023 and now expects 2023 earnings per share in the band of $11-12 (prior view: $10-$12).
Riding on the buoyant air traffic scenario, UAL shares have gained 31.1% year to date. UAL surpassed the Zacks Consensus Estimate for earnings in three of the last four quarters and missed the mark on the other occasion. The average beat is 17.2%. UAL too currently sports a Zacks Rank #1.
American Airlines, currently carrying a Zacks Rank #3 (Hold), is benefiting from an improvement in air travel demand. Recently, American Airlines’ management lifted the earnings per share forecast for 2023. The company now expects 2023 earnings (on an adjusted basis) in the band of $3-$3.75 per share (earlier view was in the $2.5-$3.5 per share range).
Driven by upbeat demand, current-year adjusted operating margin is now anticipated in the 7-9% band (earlier guidance:11-13%). The Zacks Consensus Estimate for AAL’s current-year earnings has been revised upward by 17% in the past 60 days.
Ryanair Holdings PLC (RYAAY): Free Stock Analysis Report
United Airlines Holdings Inc (UAL): Free Stock Analysis Report
American Airlines Group Inc. (AAL): Free Stock Analysis Report
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