Airline stocks continue to trade in the red owing to volatile crude oil prices and the recent profit warning from IATA (International Air Transport Association) and several big players within the industry. Franco-Dutch airline group Air France-KLM, followed close on the heels of its German counterpart Lufthansa, is issuing a profit warning for 2014, which dragged most of the stocks down on Tuesday trade.
Air France-KLM now expects a full year profit between €2.2 and €2.3 billion, down from the previous expectation of €2.5 billion. The airline behemoth blamed overcapacity on transatlantic routes, weak cargo demand and a currency dispute in Venezuela for the cautious outlook.
Some of the big European and U.S. carriers have been suffering from overcapacity issues, particularly in the transatlantic route. Added to that is the emergence of big Gulf carriers like Emirates, who are here to stay and are providing stiff competition in some of the lucrative intercontinental routes.
Delta Airlines Inc. (DAL) recently reported weaker-than-expected traffic figures for Jun 2014 due to a drop in demand among corporate travelers in Brazil and cut in fares by the Gulf carriers. The premier passenger carrier further warned that a slowdown in certain international markets due to excess passenger seats could push fares lower than expected. Further, Air France-KLM and Delta are among those carriers who are struggling to repatriate revenues from Venezuela due to strict foreign currency controls.
Last month, the airline industry suffered a major setback when IATA trimmed down its earlier provided 2014 profit outlook by $700 million to $18 billion. According to the international governing body, rising infrastructure cost, poor air traffic management, heavy tax burden and rising fuel cost will weigh on the industry’s bottom line, thus pushing 2014 expected margins down by 10 basis points to 2.4%.
To add to the woes, the current scenario in Iraq is also not helping the airline industry’s cause. The political crisis in Iraq continued to raise supply concerns in the Middle East, thus pushing crude oil prices higher. With jet fuel being a major constituent for the carrier, crude’s volatile nature continues to affect jet fuel price, thus impacting profitability.
Since the beginning of June, many of the airline stocks have gone downhill. However, among them, United Continental Holdings Inc. (UAL), Hawaiian Holdings Inc. (HA) and Delta Airlines Inc. have plunged the most with price declines of 15.33%, 15.13% and 10.62% respectively.
A sharp drop in the U.S. unemployment rate and the improving pace of job creation bodes well for the U.S. economy in the second half of the year. This, in turn, could prove beneficial for the airline industry. However, high jet fuel prices coupled with constant rise in international capacity as against demand could weigh on the performance of the industry players going forward.
3 Airline Stocks to Avoid
SkyWest Inc. (SKYW) is one of the largest regional carriers in the U.S. and operates through its wholly owned subsidiaries SkyWest Airlines and ExpressJet. The airline provides passenger and air freight service for Delta Connection, United Express, US Airways Express, American Eagle and Alaska Airlines under code share agreements.
This St George, UT-based company currently has a P/E ratio of 29.43 and is trading at a significant premium to the industry average of 3.70. This Zacks Rank #4 (Sell) stock also has a negative earnings growth estimate of 62.05% for full year 2014.
Controladora Vuela Compa (VLRS) provides air transportation services for passengers, cargo, and mail in Mexico and the international markets under the brand Volaris. The carrier is a leading player in the Mexican domestic market and has a total fleet size of 48 Airbus aircraft.
This low-cost carrier has reported a negative average earnings surprise of 87.50% in the past four quarters and also holds a negative earnings growth estimate of 110.29% for 2014. The Mexico City-based carrier currently carries a Zacks Rank #4.
LATAM Airlines Group S.A. (LFL) along with its subsidiaries provides passenger and cargo air transportation services in South America. The carrier resulted from the merger of LAN Airlines and TAM Airlines in Jun 2012 and is currently based in Santiago, Chile.
This Zacks Rank #4 company currently has a P/E ratio of 34.97 and is trading at a significant premium to the industry average of 3.70. The stock has also has reported a negative average earnings surprise of 20.85% in the past four quarters.
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