The aviation industry has posted steady profits ever since the carriers started restructuring and consolidating. In the second quarter, the industry is said to have amassed record quarterly profit of more than $5 billion. The plunge in fuel prices coupled with strategic investments to bring in more passengers on board have buoyed profit margins. These factors also offset headwinds such as foreign currency fluctuations and increase in labor costs.
Airlines also issued dividends, bought back shares and paid off debts. Hence, it will be a prudent idea to invest in airline stocks that have the potential of continued earnings growth in the near term. Before we cherry pick such stocks let us look into the various factors driving growth in the industry.
Q2 Earnings
American Airlines Group Inc. AAL, Delta Air Lines, Inc. DAL, Southwest Airlines Co. LUV and United Continental Holdings, Inc. UAL together raked in net income of $4.99 billion in the second quarter. Meanwhile, United Continental posted its highest profit for the second quarter at $1.3 billion.
Alaska Air Group, Inc. ALK also posted record second quarter earnings of $230 million, a year-over-year improvement of 46%. Banking on this stellar Q2 performance, airlines have a combined net income of more than $8.55 billion through the first half of 2015. This is significantly higher than the $3.76 billion posted in 2014.
Plummeting Oil Prices
Last Monday, Southwest Airlines chairman Gary Kelly said: “Fuel prices were down 33 percent to a little over $2 a gallon, and of course, that was a huge driver in our year-over-year earnings increase”.
A global supply glut and growth worries due to uncertainty about China’s economy are primarily responsible for the continuous slump in oil prices. Iran’s plan to step up supply after the removal of sanctions and the move to lift a 40-year ban on U.S. oil exports could result in further declines in oil prices.
Higher Customer Satisfaction
Strategic factors like investments in In-Flight Connectivity and better services also lured customers into planes and lifted profit margins. Airlines have remodeled facilities, refurbished planes and established brand partnerships.
Airlines have responded to business travelers’ preferences by introducing fast and reliable Wi-Fi. They are now competing on choices given to customers, more than competing on price.
Rise in Air Travel
Carriers’ intentions to invest toward upgrading facilities associated with customer satisfaction are likely to result in greater travel demand. Further, an improving economy is expected to boost demand.
According to the International Air Transport Association (IATA), air travel is expected to grow at 6.7% in 2015 compared to 6% growth last year. While projected travel growth is expected to be higher than the trend witnessed in the last two decades, load factor for this year is also anticipated to touch a record high of 80.2%.
4 Prominent Picks
Airlines’ profit margins are expected to move north banking on the rise in travel demand due to strategic investments and continuous drop in oil prices. IATA expects global net profit for the industry to come in at $29.3 billion, while in 2014 the figure was at $16.4 billion. Global net profit margin is expected to increase to 4% in 2015. Airline companies also expect to earn $8.27 per passenger in 2015, up 67.4% year over year.
Hence it will be sensible to invest in the following airline stocks that have solid earnings growth prospects in the near future. These stocks are poised to reap the benefits of slump in oil prices and increase in travel demand in order to lift their profit margins.
Our selection in also backed by good Zacks Growth Score and Zacks Rank. We narrowed down our choices with the help of our style score system.
JetBlue Airways Corporation JBLU is a low-fare and low-cost passenger airline. JBLU holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A’.
JBLU has expected earnings growth of 160.8% for the current year. In the past two months, the Zacks Consensus Estimate for the current year was revised 3.4% higher.
SkyWest Inc. SKYW operates as one of the larger regional airlines in the U.S. SKYW holds a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of ‘B’.
SKYW has expected earnings growth of 9.68% for the next quarter. Over the past two months, the Zacks Consensus Estimate for the current year was revised 35.7% higher.
Alaska Air has two principal subsidiaries that operate as airlines. ALK holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘B’.
ALK has expected earnings growth of 48.2% for the current year. In the past two months, the Zacks Consensus Estimate for the current year was revised 2.8% higher.
Allegiant Travel Company ALGT through its subsidiary operates as a low-cost, high-efficiency passenger airline. ALGT holds a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of ‘B’.
ALGT has expected earnings growth of 94.5% for the current year. Over the past two months, the Zacks Consensus Estimate for the current year was revised 5.1% higher.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment