Over the past week, most airline stocks gained on the news that the Organization of Petroleum Exporting Countries (OPEC) have decided to not go for an oil production cut. The concern of oversupply resulted in oil prices falling to their lowest level since 2009 during the weak. However, the oil price decline benefited carriers as fuel costs account for a major chunk of an airline's operating expenses.
Apart from that, headlines were dominated by the pilots’ strike at Germany’s Deutsche Lufthansa Aktiengesellschaft (DLAKY) after talks between the union and the management over early retirement benefits failed. The pilots, who have gone on strike multiple times this year over the issue, have again threatened to do so later in the week.
Delta Air Lines, Inc. (DAL) revealed modest growth in November traffic despite strong performance domestically and the presence of the busiest travel day in the year (the Sunday post Thanksgiving) in November. The carrier was also in the news due to its decision to cut flights to Ghana. Delta is constantly reducing its operations in Africa, which we suspect is due to the prevalence of Ebola.
Overall, the airline sector is going through a purple patch with stocks having rebounded strongly from the lean period aided by healthy earnings reports and weak oil prices.
(Read last to last week’s developments here: Airline Stock Roundup for Nov 26, 2014)
Recap of the Week’s Most Important Stories
1. Trouble does not seem to end at Germany’s Deutsche Lufthansa Aktiengesellschaft. Pilots observed a 2 day strike on Dec 1 and Dec 2 after talks with management over early retirement benefits failed. The pilots’ union is in favor of retention of a plan which permits pilots to retire on attaining the age of 55 and still get up to 60% of their pay prior to the commencement of regular pension payments ten years later (read more: Lufthansa Hit by Cancellations as Pilots Go on Strike Again).
2. Delta Air Lines has trimmed the number of flights it operates to Ghana by 20%. Even though Delta did not cite any specific reason for slashing the number of flights to Ghana, we believe that the decision has been influenced by the prevalence of Ebola in Africa, particularly in the western region of the continent (read more: Is Delta Turning its Back on Africa due to the Ebola Scare?).
Delta also revealed traffic results for the month of November. Strong domestic performance and the shift of the Sunday following Thanksgiving (the busiest travel day) to November this year, pulled passenger revenue per available seat mile up by 4.5% year over year. Load factor improved to 80.6% from 79.4% recorded in November 2013. The company registered a completion factor of 99.9%, with nearly 86.6% of flights on schedule.
3. Leading Latin American carrier Gol Linhas Aéreas Inteligentes S.A. (GOL) adjusted its forecast for 2014 operating margin. The company expects to end 2014 with operating margin in the band of 4% to 6% as opposed to the earlier guidance range of 3% to 6%. The carrier also projects flat year over year domestic supply in 2015 (read more: GOL Tweaks 2014 Operating Margin Guidance; Other Aspects Stay ).
4. Shares of low-cost carrier Spirit Airlines, Inc. (SAVE) were positively impacted after it was awarded the top rank for fuel efficiency among U.S.-based carriers in 2013, according to a report released by the International Council on Clean Transportation. However, the overall content of the report, which measures fuel efficiency, and therefore carbon intensity of U.S. airlines in 2013, is not all that encouraging. The findings indicate that most airlines are far from being environment-friendly (read more: Spirit Airlines Gets Top Rank for Fuel Efficiency, Shares Up).
5. In a bid to expand further and improve customer convenience, U.S. based carrier JetBlue Airways (JBLU) announced the launch of new flights to Curaçao in the Caribbean. The carrier already operates the largest number of flights from the U.S. to the Caribbean. The addition of Curaçao brings the number of daily flights operated by JetBlue between U.S. and the Caribbean to 121. Out of those, 56 operate nonstop from New York's John F. Kennedy International Airport and Newark Liberty International Airport. There are 26 routes from the above mentioned airports to the Caribbean.
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 |
9.46% |
33.54% |
|
JBLU |
8.98% |
48.26% |
|
AAL |
6.40% |
15.49% |
|
UAL |
5.87% |
24.98% |
|
SAVE |
5.26% |
35.32% |
|
LUV |
3.0% |
48.75% |
|
DAL |
0.97% |
8.55% |
|
CPA |
0.97% |
-23.36% |
|
ALK |
-1.7% |
10.62% |
|
GOL |
-3.47% |
-5.21% |
As the chart above suggests, the share prices of most of the major airline stocks were up over the past week following the OPEC oil cartel’s refusal to curb output. Hawaiian Holdings Inc. emerged as the biggest gainer during the period with its shares rising 9.46%. Southwest Airlines Co. (LUV) witnessed the highest upside (48.75%) over the last six months compared to its peers.
What’s Next in the Airline Biz?
Airline stocks are expected to continue benefiting from weak oil prices. Moreover, the investor day presentation of Alaska Air Group, Inc. (ALK), scheduled for Dec 4 is expected to be attractive. Companies like United Continental are also expected to come out with their November traffic numbers in the coming week. Investors will also look forward to the performance of Lufthansa, with pilots again threatening to go on strike later in the week.
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