It is a well-documented fact that oil prices have been tumbling for well over a year now. On Monday, Dec 7, prices of U.S. crude plummeted to its lowest level in nearly seven years, and were seen hovering around the $38 a barrel mark. What triggered off the commodity hitting new lows was the decision of the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – to not curb the output of crude.
The group's 12 member countries from the Middle East, Africa and Latin America, decided at its meeting in the Austrian capital of Vienna on Friday, Dec 4, that the daily crude production would be approximately 31.5 million barrels (the previous production cap was officially 30 million barrels). The cartel’s move defied expectations of an output cut in response to the prevailing supply glut.
OPEC’s ‘Keep Pumping’ Theory Boosts Carriers
The cartel believes that the plan to ‘keep on pumping’ would ultimately revive demand and more importantly, peg back growing competition in the U.S. shale industry. This belief led to the decision to not curb production and instead let the commodity slide. In the wake of the ruling, January West Texas Intermediate crude slid 5.8% to $37.65 a barrel on Monday on the New York Mercantile Exchange. This marks the largest single day percentage loss since September.
Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. Consequently, it was no surprise that airline stocks gained altitude as oil touched new lows on Monday.
Notably, major airline players like Alaska Air Group, Inc. ALK, United Continental UAL, Hawaiian Holdings Inc. HA, Southwest Airlines LUV American Airlines Group AAL and Delta Air Lines DAL have gained significantly in the post-OPEC decision environment. Consequently, it is no surprise that the NYSE ARCA Airline index has been soaring ever since the organization revealed its decision last Friday.
OPEC’s Decision Ensures Continuance of Carriers’ Dream Run
The weakness in oil prices has persisted for over a year now. The concern of oversupply is mainly responsible for the massive fall in the price of crude, given that that it was consistently above the $100 mark about a year ago. The cut in oil prices has reduced airline companies’ operating expenses significantly, thereby aiding their bottom line.
In such a scenario, the cartel’s refusal to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times will continue for carriers.
What spelled disaster for oil stocks proved to be a boon for airline stocks. This is because fuel costs account for a major chunk of an airline's operating costs. Consequently, sinking fuel costs have resulted in huge savings for carriers. For example, American Airlines Group, which does not hedge fuel costs, expects to generate savings of approximately $5 billion in 2015.
The massive savings have certainly cushioned the financial health of carriers. This has prompted the companies to launch share buyback programs, make increased dividend payments and significantly reduce their debt levels. Buoyed by their sound financial health, several carriers intend to invest heavily toward upgrading overall facilities for better customer satisfaction. This is likely to result in greater travel demand, improved goodwill and eventually, a higher top line.
Stocks Worth Betting On Now
As you can see, there are plenty of reasons to be positive on the airline industry now. For investors seeking to make the most of the bullish airline landscape, we present five companies that warrant attention. Each of these stocks also sports a healthy Zacks Rank.
Hawaiian Holdings, the holding company of Hawaiian Airlines, was founded in 1929 and is headquartered in Honolulu, Hawaii. Hawaiian is Hawaii's biggest airline. It has been serving the islands for 86 years and offers non-stop service to 11 gateway US cities.
The company, with a Zacks Rank #1 (Strong Buy), has an expected earnings growth rate of 96.8% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 32 cents to $3.05 per share. Likewise, the estimate for 2016 has jumped 37 cents over the same period to $3.31. The long-term estimated earnings growth rate of 33.4% at the company exceeds the industry average of 18.4%.
SkyWest SKYW was founded in 1972 and is headquartered in St. George, UT. This Zacks Rank #1 company, through its wholly-owned subsidiary, SkyWest Airlines, Inc., operates one of the larger regional airlines in the U.S.
The company has an expected earnings growth rate in excess of 100% for the current year. Earnings estimates have risen for 2015 (up 13 cents to $1.93 over the last 60 days) as well as 2016 (up 23 cents to $2.10 over the same time frame).
Controladora Vuela Compañía de Aviación, S.A.B. de C.V., or Volaris VLRS, is an ultra-low-cost carrier, with point-to-point operations, serving Mexico and the United States.
The company, sporting a Zacks Rank #1, has an expected earnings growth rate exceeding 100% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 25 cents to $1.47 per share. Likewise, the estimate for 2016 has jumped 12 cents over the period.
Delta Air Lines, based in Atlanta, GA and founded in 1924, provides scheduled air transportation for passengers and cargo worldwide. This Zacks Rank #2 company has an expected earnings growth rate of 41.25% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 7 cents to $4.62 per share. Likewise, the estimate for 2016 has jumped 16 cents over the same time period to $5.65 per share. The long-term estimated earnings growth rate of 23.8% at the company exceeds the industry average of 18.4%.
Southwest Airlines, founded in 1967 and headquartered in Dallas, TX, is a low-cost carrier which, like its peers, is benefiting immensely from weak oil prices. The Zacks Rank #2 company has an expected earnings growth rate of 75.58% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 6 cents to $3.53 per share. Likewise, the estimate for 2016 has jumped 23 cents over 60 days to $3.98 per share. The long-term estimated earnings growth rate of 21.6% at the company exceeds the industry average of 18.4%.
To Wrap Up
We expect carriers to continue delivering impressive bottom-line growth going forward as oil prices are unlikely to touch the highs witnessed in mid-2014 anytime soon. Moreover, a higher demand for travel on the back of an improving labor market and consolidation should further aid carriers. The International Air Transport Association’s forecast, that profits from the aviation industry are likely to touch $29.3 billion in 2015 as opposed to the earlier guided $25 billion, further highlights the bright prospects ahead of aviation stocks.
In this scenario, we believe the addition of the abovementioned stocks can do wonders to your portfolio as each of these are expected to gain substantially going forward, blessed by their strong fundamentals and a favorable macro environment.
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