Airline stocks did not set the stage on fire in 2019, which is about to end, thanks to headwinds like a lackluster cargo business due to reduced freight demand and trade tensions between the United States and China, and loss of revenues following flight cancellations arising out of the grounding of Boeing 737 MAX jets.
However, amid these headwinds, Allegiant Travel Company ALGT stood out as the shining star of the Zacks Airline industry this year. Shares of this in Las Vegas, NV-based company, which operates a low-cost passenger airline through its subsidiary Allegiant Air, gained roughly 75% in a year’s time, easily outperforming the industry’s nearly 14% appreciation in the same time period.
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Let’s delve deeper and analyze the reasons behind the company’s impressive price performance:
Allegiant's results this year have been aided by strong passenger revenues, which account for bulk of the carrier’s top line. On the back of surging demand for air travel, passenger revenues increased 9.4% in the first nine months of 2019. Backed by strong passenger revenues, the company outpaced the Zacks Consensus Estimate for earnings in two of the three quarters of 2019. The bullish earnings history is a huge tailwind since earnings beat generally leads to stock price appreciation.
We are also impressed by the company's efforts to modernize its fleet. The carrier operates an all-Airbus fleet. Allegiant's fleet-size at the end of 2019 is expected to be 93 (38 A319 and 55 A320), indicating an increase of 22.4% from the year-ago reported figure. The transition to an all-Airbus fleet, completed in November 2018, increased Allegiant’s fuel efficiency. Additionally, as the carrier does not have Boeing 737 MAX jets in its fleet, it is immune to troubles that have arisen due to their prolonged grounding.
Moreover, the current-scenario of moderate fuel prices is favorable for Allegiant as expenses on fuel represent a substantial input cost for any airline company. Evidently, average fuel cost per gallon (scheduled) declined 10% to $2.17 at Allegiant in the September quarter. The company expects fuel cost per gallon of $2.15 in 2019.
Will the Scenario be Better for Airlines in 2020?
As mentioned earlier, the airline industry struggled in 2019, with the exception of the likes of Allegiant. However, things are likely to look up for airlines in the coming year.
In spite of the deal inked by the OPEC group and its allies in mid-December to cut production, most industry experts expect crude oil prices to remain stable in 2020. This outlook should support the bottom line of airline players. In fact, the International Air Transport Association expects oil prices to average around $63 (Brent) per barrel in 2020 compared with $65 expected in 2019. Fuel bill for the industry in 2020 is expected to be $182 billion, lower than 2019.
The research firm expects the entire picture with respect to airline profitability to be brighter in 2020 than 2019. Evidently, the industry is expected to generate profits of roughly $29.3 billion (average net profit per departing passenger is predicted to be $6.2 compared with 2019’s estimated figure of $5.7) in 2020 compared with the $25.9 billion predicted for 2019.
Thus, it’s time to invest in airline stocks that are likely to make hay in 2020 by replicating Allegiant’s blowout 2019 performance.
3 Solid Picks
However, given the vastness of the airline industry, identifying stocks with the potential to shine in 2020 is not an easy task. To simplify the procedure, we have selected stocks carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Deutsche Lufthansa DLAKY functions as an aviation company in Germany as well as internationally. The Zacks Consensus Estimate for its 2020 earnings has been revised 8.8% upward in the last 60 days. Additionally, this Zacks Rank #1 stock carries a VGM Score of A. The company has expected earnings per share growth of 17.3% for 2020, against the industry’s 11.8%.
Ryanair Holdings RYAAY is based in Ireland and provides scheduled-passenger airline services. The Zacks Consensus Estimate for next-year earnings has been revised 8.8% upward in the last 60 days. The company has expected earnings per share growth of 33.1% for next year, again exceeding the industry’s projected rise. Ryanair too sports a Zacks Rank #1.
Spirit Airlines SAVE is an ultra low-cost carrier, based in Miramar, FL. The Zacks Consensus Estimate for 2020 earnings has been revised 2.9% upward in the last 60 days. Spirit Airlines carries a Zacks Rank #2.
Zacks Top 10 Stocks for 2020
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