After a prolonged battle with soaring jet fuel prices and capacity pullback to optimize the cost structure, airline companies are on a spree to expand network capacity. Companies like Delta (DAL), JetBlue (JBLU) and Southwest (LUV) are the latest to join the bandwagon after United Continental (UAL) announced last week that it will launch flights in new international routes in the first half of 2012.
United Continental, through its subsidiaries United and Continental Airline is set to leverage the benefits of profitable routes (including the emerging networks) by adding more flights on them and curtailing flights on those that are non-profitable.
Continental will commence daily flights between Houston's Bush Intercontinental Airport and Lagos, Nigeria, on November 16. United will begin its nonstop daily flights between New York/Newark Liberty and Buenos Aires, Argentina, in April 2012 and Continental will fly between New York/Newark Liberty to Frankfurt Airport from January 2, 2012.
Continental will also begin nonstop weekly flights between Los Angeles and Durango, Mexico in March 2012 and continuous daily flights from Washington Dulles International Airport to Manchester Airport in May 2012 and to Dublin in June 12.
Following this news, Delta also queued up its network expansion plans. The carrier will introduce 12 new daily flights to 11 domestic and Caribbean markets during the first half of 2012 to capitalize on the surge in air travel on these routes.
In March, Delta will add services from New York-JFK to various destinations in Latin America and nonstop new flights between New York-LaGuardia and Nassau, Bahamas. Delta will also connect seven U.S. cities like Austin, Jacksonville, Kansas City, New Orleans, Milwaukee, San Francisco and Los Angeles with JFK airport in June 2012.
With respect to domestic airlines, Southwest Airline was the first to announce new international flights connecting Houston Hobby to San Juan, Puerto Rico, and to three other cities in Mexico. The carrier will begin these services by May 2012.
Additionally, AirTran, the subsidiary of Southwest is also slated to fly between Ft. Lauderdale, Hollywood and San Juan, Puerto Rico and Denver. Trailing a little behind, JetBlue will also add two daily flights connecting San Juan, Puerto Rico, and Ft. Lauderdale in May next year.
The host of services introduced on new and existing networks reflects a positive momentum in the airline industry for the upcoming year. Apart from their dwindling cost structures, these carriers remained challenged by inclement weather conditions and fluctuating economy in the past quarters. Nevertheless, the carriers are expected to hit the growth trajectory based on improving passenger traffic and cargo volumes, particularly in international routes, as well as aggressive fare hikes.
The IATA (International Air Transport Association) projects demand growth of 5.9% in the current year and 4.6% in the following year. Further, it expects revenues to increase up to $632 billion on the aggressive fare hikes. However, the profit margin is expected to be only 1.2% for 2011 and 0.8% for 2012 given the negative impacts of fuel prices.
As a result, we remain cautious on these stocks and continue to maintain our long-term Neutral rating on Delta Air Lines, United Continental, Southwest Airlines and JetBlue.
DELTA AIR LINES (DAL): Free Stock Analysis Report
JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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