There were quite a few updates last week from companies in the airline industry. However, all that was overshadowed by the airline sell-off that reflected dwindling investor confidence. The airline industry, which has had an incredibly good run over the past couple of years, tumbled significantly last Wednesday.
The trigger was Southwest Airlines’ LUV announcement at the Wolfe research global transportation conference that it plans to increase its capacity in the band of 7% to 8% in 2015 as opposed to the earlier projection of a 7% increase.
Southwest’s projection caused panic among investors who feared that the capacity expansion would lead to an oversupplied market even as fuel costs continue to be weak. The capacity additions could further result in a possible price war between legacy and low-cost airlines.
Meanwhile, American Airlines Group’s AAL CEO Doug Parker stated that the carrier intends to compete aggressively against the capacity expansion and will not lose customers on pricing grounds. However, some market watchers have called the selloff, which caused a loss of approximately $10 billion in market value last Wednesday, a mere overreaction.
Apart from this, airline behemoth Delta Air Lines DAL was in the headlines owing to its plans for expansion in Brazil. Not falling behind, Southwest Airlines, in keeping with its expansion initiatives, announced a new non-stop service from the Ronald Reagan Washington National Airport (DCA) to Orlando, FL, effective Nov 1, 2015.
According to data released by the Bureau of Labor Statistics, average airfares in the U.S. for the month of April decreased 1.3% over Mar 2015. The April figure was also down 7.5% on a year-over-year basis.
European low-cost carrier Ryanair Holdings plc RYAAY performed very well in fiscal 2015 (ended Mar 31, 2015). The annual net profit of this Ireland-based budget airline jumped 66% on a year-over-over basis on the back of increased revenues and low costs. Moreover, the carrier, which is seeing good times thanks to its customer friendly “Always Getting Better (AGB)” scheme, presented a rosy outlook for fiscal 2016.
Overall, it was a bearish week for the sector. Major airline stocks plummeted in the wake of the airline sell-off. The upward movement of oil prices added to the woes. In view of this bearish sentiment, the NYSE ARCA Airline index declined 3.4% over the past week.
(Read the last Airline Stock Roundup for May 20, 2015)
Recap of the Past Week’s Most Important Stories
1. Share prices of major airline stocks including Southwest Airlines, United Continental Holdings UAL and American Airlines plummeted following the news that Southwest Airlines intends to increase its capacity in the range of 7% to 8% in 2015 as opposed to the earlier projection of a 7% increase.
Investors were clearly concerned that airline capacity growth at a rate higher than the U.S. GDP would lead to an oversupplied market. With major airline stocks plummeting, the recently launched airline ETF – U.S. Global Jets ETF – also lost value (read more: Air Stocks and ETF Plunge).
2. Delta Air Lines, which is constantly looking to expand its operations, filed for regulatory approval to connect Orlando, FL and Sao Paulo, Brazil. Delta intends to introduce non-stop flights on the route effective Dec 19, 2015 following the approval. Delta’s agreement with Brazilian carrier GOL Linhas Aereas Inteligentes GOL should pay off well in this regard (read more: Delta to Expand in Brazilian Skies, Connect Orlando-Sao Paulo ).
3. In a bid to expand its operations and improve customer convenience, Southwest Airlines announced that it intends to boost its service in Florida. In line with this objective, the carrier intends to introduce a non-stop flight on a daily basis on the DCA- Orlando route from Nov 2015 (read more: Southwest Airlines to Boost Service in Florida)
4. Data released by the Bureau of Labor Statistics suggest that average airfares in the U.S. for Apr 2015 declined 7.5% on a year-over-year basis. Soft oil prices over the period and increased competition were primarily responsible for the decline. The figure was down 1.3% from Mar 2015 on a seasonally adjusted basis, once again reflecting the brunt of soft oil prices (read more: Airline Fares Decline in April, Soft Oil Prices Hold Key).
5. Ryanair Holdings reported robust financial and operating numbers with net profit for fiscal 2015 up 66% year over year at €867 million. Moreover, load factor increased 500 basis points to 88% while air traffic for the year jumped 11% to 90.6 million. The strong performance of Ryanair was mainly buoyed by lower fuel prices, attractive fares, continuous route expansion, allocated seating and extra carry-on luggage facilities.
Moreover, the carrier has launched the AGB program which has drawn massive number of new customers to Ryanair. In order to target business class passengers, Ryanair has launched business friendly air ticket facilities which have further driven demand for the carrier, thus ramping up profits. However, profit for the reported period was offset by the company’s decision to enter into a long-term fuel hedge contract of $92 per barrel.
Robust passenger growth coupled with the onset of one of the busiest summer holiday seasons ever has encouraged the carrier to expect profits for fiscal 2016 in the range of €940 million to €970 million. The company also plans to carry more than 100 million passengers for the first time in fiscal 2016.
Performance
The following table shows the price movement of the major airline players over the past week and during the last 6 months.
|
Company |
Past Week |
Last 6 months |
|
HA |
-9.68% |
14.05% |
|
UAL |
-17.10% |
-15.20% |
|
GOL |
-4.86% |
-57.57% |
|
DAL |
-11.97% |
-10.33% |
|
JBLU |
-12.07% |
33.70% |
|
AAL |
-15.67% |
-14.36% |
|
SAVE |
-12.65% |
-27.46% |
|
LUV |
-14.47% |
-13.92% |
|
CPA |
-4.28% |
-21.71% |
|
ALK |
-8.02% |
5.66% |
As the chart above suggests, all airline stocks traded in the red over the past week, due to the major selloff in the space. Shares of American Airlines Group depreciated the most, losing 15.67% over the past week. Furthermore, most of the stocks shed value over the last six months. JetBlue Airways JBLU was a notable exception having gained appreciably (33.70%) over the six-month period.
What’s Next in the Airline Biz?
With the recent airline sell-off on capacity and pricing worries deemed more of an overreaction, we expect the dust to settle soon. With nothing major lined up at the moment, stay tuned for usual news updates in the space. Focus, in particular, will remain on the price movement of airline stocks, given the volatile nature of oil prices lately.
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