The outlook for the Zacks Transportation - Airline industry is bright with the air travel demand scenario appearing rosy. Declining fuel costs also bode well for airlines. This is because expenses on fuel represent a key input cost for airlines.
As a result, we believe that investors interested in the industry would do well to bet on stocks like United Airlines, American Airlines and Alaska Air Group for higher returns.
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 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, the demand for air travel is extremely rosy now. The focus on boosting cargo revenues is a positive, too.
Factors Relevant to the Industry's Fortunes
Upbeat Passenger Volumes: With air travel demand being strong, airlines’ top-line performance has been impressive. While air travel demand is particularly strong on the leisure front, it is heartening to note that business demand has made an encouraging comeback. Upbeat passenger volumes during the Thanksgiving and broader winter holiday period caused many airlines to offer bullish views for the final quarter of 2024. For example, AAL now expects fourth-quarter adjusted earnings per share to be between approximately 55 cents and 75 cents (earlier guidance was in the 25-50 cents range).
Low 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 prices declined 14% in the July-September period mainly due to the weakening global demand. China's economy, the world’s largest oil importer, struggled with a slowdown in manufacturing, shrinking for the fifth consecutive month by September.
Uptick in Labor Costs: The increase in expenses on the labor front represents another challenge 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 Bright Prospects
The Zacks Airline industry is a 26-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #51, which places it in the top 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 bright 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 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 2025 has improved by 7.8% since August 2024.
Before we present a few stocks that you may want to add to your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Surpasses Sector and S&P 500
Over the past year, the Zacks Transportation - Airline industry has gained 33.5% compared with the S&P 500 composite’s rise of 26.9%. The broader sector has declined 1.6% 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 1.15X compared with the S&P 500’s 5.47X. It is also below the sector’s forward 12-month P/S of 1.79X.
Over the past five years, the industry has traded as high as 1.16X, as low as 0.41X and at the median of 0.67X.
3 Airline Stocks to Bet On
American Airlines is based in Fort Worth, TX. The gradual increase in air travel demand (particularly leisure) has been aiding AAL. Low fuel costs are driving the bottom line.
Over the past 60 days, the Zacks Consensus Estimate for 2025 earnings has increased 16.8%. AAL currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Alaska Air is based in Seattle, WA. The airline is being aided by the uptick in air travel demand. The carrier’s shareholder-friendly attitude also bodes well.
Over the past 60 days, the Zacks Consensus Estimate for 2025 earnings has been revised 10% upward. The carrier surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters by an average of 23.2%. ALK currently sports a Zacks Rank #1.
United Airlines, based in Chicago, currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings has been revised 3.5% upward over the past 60 days.
Strong air travel demand, supported by new routes, represents a major tailwind for UAL. The environment-friendly approach also bodes well for the company.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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