Chicago, IL – May 27, 2022 – Today, Zacks Equity Research discusses Delta Air Lines DAL, Southwest Airlines LUV and Alaska Air Group ALK.
Industry: Airline
Link: https://www.zacks.com/commentary/1929456/3-airline-stocks-to-stick-to-despite-steep-fuel-costs
The recent oil price surge does not bode well for bottom-line growth of the Zacks Airline industry players. This is because fuel expenses are a significant input cost for the aviation space. However, improving air-travel demand is a major positive.
With passenger revenues increasing despite the elevation in one of its major input costs, the industry is recovering fast from the pandemic lows. Airline players like Delta Air Lines, Southwest Airlines and Alaska Air Group are likely to benefit from robust demand for air-travel.
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 for offering 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 industry 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.
High Fuel Costs Limit Bottom-Line Growth: The current scenario of rising fuel costs is denting the bottom line of the airlines. Oil price is moving northward, mainly due to supply concerns triggered by the Russia-Ukraine war. Notably, oil price escalated 33% in first-quarter 2022. Due to this escalation, fuel price per gallon increased substantially on a year-over-year basis in the March quarter. At Delta, the metric increased 37% to $2.79.
Management expects fuel price per gallon in the $3.20-$3.35 range during the June quarter. Oil price is likely to continue increasing this year. Per the U.S. Energy Information Administration, the average Brent crude oil spot price will be $107 a barrel in second-quarter 2022 and $103 per barrel in the second half of 2022. The rise in a major input cost is likely to shoot up airfares, making air-travel costlier.
Uptick in Air-Travel Demand Bodes Well: Air-travel demand, which was poorly hit by the pandemic gloom, is gradually returning to pre-COVID levels. This has been possible of late with the gradual resumption of economic activities as pandemic-related restrictions are being relaxed. Administered with jabs that shield against viruses, more and more people are taking to the skies.
The situation in the United States is likely to get rosier, with air-travel demand expected to accelerate in the summer season. In fact, the warmer spell of this year is predicted to be the busiest travel season since the start of the pandemic. Airlines are likely to benefit hugely from this pent-up demand.
Business Air-Travel Remains a Laggard: Despite the improvement in leisure air-travel demand, the same for business is still anemic. Per Delta's management, domestic corporate sales in first-quarter 2022 were only 50% recovered compared to the first-quarter 2019 levels.
On the international front, corporate sales for the quarter were only 35% recovered. Health concerns related to COVID-19 are likely to continue hampering business travel at least in the near term.
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 that stemmed from overwork 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.
The Zacks Airline industry is a 29-stock group within the broader Zacks Transportation sector. It currently carries a Zacks Industry Rank #156, which places it in the bottom 38% of more than 250 Zacks industries.
The group's Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates dim 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 earnings estimates for 2022 have declined 95.5% year over year.
Despite the industry's drab near-term view, we will present a few stocks that one should keep tabs on. Before that, it's worth taking a look at the industry's shareholder returns and its current valuation.
Due to the fuel cost woes and other headwinds, the Zacks Airline industry has underperformed the Zacks S&P 500 composite as well as the sector over the past year.
The industry has decreased 37.8% over this period against the S&P 500's decline of 7.1%. The broader Zacks Transportation sector has shed 20.1% of its value in the same period.
The Price/Sales (P/S) ratio is often used for valuing the airline stocks. The industry currently has a forward 12-month P/S of 0.45X compared with the S&P 500's 3.82X. It is also below the sector's forward-12-month P/S of 1.67X.
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.
Delta Air Lines: Improved air-travel demand, particularly on the domestic front, is aiding Delta. Anticipating travel-demand to increase further, DAL provided a bullish outlook for the second quarter. DAL expects revenue recovery to accelerate to 93-97% in the second quarter, with unit revenues likely to rise in double digits from the second-quarter 2019 tally.
Delta expects to generate a strong free cash flow in the June quarter. DAL currently sports a Zacks Rank #1 (Strong Buy). The positivity surrounding the stock is evident from the Zacks Consensus Estimate for current-year earnings being revised 71.4% upward over the past 60 days. DAL has a Growth Style Score of A.
You can see the complete list of today's Zacks #1 Rank stocks here.
Southwest Airlines: Continued recovery in air-travel demand bodes well for LUV. Anticipating a steady improvement in bookings, the carrier expects to reap profits in the remaining three quarters of 2022 as well as for the full year. LUV's management predicts operating revenues to increase 8-12% in the second quarter of 2022 from the comparable period's level in 2019. LUV is seeing strong bookings for spring and summer travel.
Southwest Airlines currently flaunts a Zacks Rank of 1. The positivity surrounding the stock is evident from the Zacks Consensus Estimate for current-year earnings being revised upward in excess of 100% over the past 60 days. LUV has a Growth Style Score of B.
Alaska Air, like DAL and LUV, expects the air-travel demand scene to get brighter with the summer fast approaching. ALK's management predicts a double-digit percentage increase in yield, unit revenues and pre-tax margin in the June quarter from the second-quarter 2019 actuals. Moreover, driven by high passenger revenues, ALK expects to reap profits from the second quarter onward through 2022.
Alaska Air currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for current-year earnings has been revised 30.7% upward over the past 60 days. ALK has a Growth Style Score of A.
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Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
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