The vote, last week, by Britons in favor of exiting the European Union (Brexit) shocked markets globally, taking indexes into a tail spin. The airline industry hasn’t been spared the onslaught, with stocks plummeting on fears of slackening travel demand.
According to the International Air Transport Association (IATA), with Brexit materializing, U.K.’s air passenger market is expected to shrink in the band of 3% to 5% by 2020. In fact, U.S. carriers with exposure to Britain have borne the brunt of the Brexit vote. The Fort Worth, TX-based American Airlines Group AAL has been a major sufferer with its shares losing over 8% as it has high exposure (6.2% of capacity) to the U.K.
Other airline heavyweights like Delta Air Lines, Inc. DAL are also at risk following the disclosure of the results of the U.K. referendum which revealed that 51.9% of the votes were cast in favor of Brexit while 48.1% opposed the notion (read more: 4 U.S. Airline Stocks at Risk as UK Opts for Brexit).
Terror Attacks on the Rise
In fact, the Brexit vote is not the only challenge confronting airline stocks. Stocks in the space have been grappling with issues arising from the mass shooting in Orlando on Jun 12, described as the worst in the nation’s history. Such attacks hit carriers hard due to the associated fears of declining travel demand on security issues.
Airline stocks had moved south each time there has been an act of terror in the recent past. The attacks in Paris (Nov 2015), Brussels (Mar 2016) and the EgyptAir tragedy (May 2016) had all spelt doom. Apart from Brexit and terror-related issues, airline stocks are facing headwinds such as declining unit revenues as well.
Rebound in Sight?
Going by the price movement in the last two trading sessions, airline stocks seem to be bouncing back from the Brexit induced slump. The NYSE ARCA Airline index has gained over 5% over the same time frame.
Stocks in the airline space were not affected by the Jun 28 attacks at the Istanbul airport. This clearly highlights that the impact on carriers of such heinous acts are declining with the increase in frequency. Thus, it is highly probable that the consequences of such attacks are already priced in. However, we can get a more concrete view of this issue with time.
Oil: Chief Benefactor
It is common knowledge that cheap oil has benefited airline stocks immensely, resulting in massive savings as fuel represents one of the major expenses for carriers. Consequently, we have seen a surge in shareholder friendly (dividend and buybacks) and employee friendly (profit sharing) activities in the space.
The improved financial status of carriers has encouraged them to make substantial investments aimed at enhancing the flying experience for passengers.
Crude Resurgence: Not a Concern
Oil prices have been moving up for the last few months. The commodity is currently hovering around $50 a barrel, representing a significant upsurge from the 12-year low of $26.21 in Feb 2016. However, despite oil’s significant recovery, the commodity is still trading at about half the level witnessed two years ago.
That oil prices will continue to aid airline stocks, at least for the remainder of the year, was hinted by the IATA projection of crude oil price (Brent) being $45 a barrel in 2016, compared to the 2015 price of $53.9 a barrel. Moreover, fuel expenses are projected to be almost 30% less in 2016 on a year-over-year basis.
Strong Stocks
The above write-up clearly suggests that airlines are poised to fly high in the days ahead. Consequently, adding airline stocks to one’s portfolio won’t be a bad choice despite the hiccups.
However, picking the right stocks is no mean feat, especially during times as distressing as this. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy. In addition to a compelling Zacks Rank, we have utilized our new style score system, to zero-in on four airline stocks with bright prospects.
Our Choices
Skywest Inc. SKYW: The carrier, headquartered at St. George, UT, operates as one of the major regional airlines in the U.S. The Zacks Consensus Estimate for the current year has moved up 4.5% over the last 60 days.
Zacks Rank #1 (Strong Buy)
P/E:10.17 (versus 15.70 for the industry)
Value Score: A
Cathay Pacific Airways Ltd. CPCAY: The international airline is based and registered in Hong Kong. It also offers airline catering, aircraft handling and engineering services.
Zacks Rank #1
P/E: 5.34 (versus 15.70 for the industry)
Value Score: A
ANA Holdings Inc. ALNPY: This Tokyo-based company offers scheduled & unscheduled air passenger as well as air courier services. It is also involved in the buying, selling, leasing and maintenance of aircraft and aircraft parts. The Zacks Consensus Estimate for the current year has risen 12.5% over the last 30 days.
Zacks Rank #2 (Buy)
Value Score: B
Growth Score: A
P/E: 12.91 (lower than the industry average)
GOL Linhas Aereas Inteligentes S.A.GOL: This Brazilian low-fare airline has received a series of encouraging news lately. The carrier is undergoing a thorough restructuring process. Meanwhile, the company's top line is poised to benefit from the upcoming Rio Olympics. The carrier should also immensely benefit if 100% foreign ownership is allowed in the nation’s carriers. Further, the bottom line is expected to expand 38.6% in 2017, way above the industry average of 7%.
Zacks Rank #2
Growth Score: A
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