The International Air Transportation Association recently released financial metrics detailing the profitability prospects for the nation’s major passenger air carriers in 2013. Overall, the report justifies the run up in airline stock prices thus far this year, potentially further supporting the shares and allaying concerns of a demand slowdown.
Important industry measures, such as load factors (seating occupancy) and airfares are on the rise, as the desired effects of consolidation are now visible. The primary wild card remains oil prices, which the IATA sees averaging around $108 a barrel this year, whereas the current price is about $94. In all, the announcement confirms my core beliefs that the air transport sector has set forth on a more lucrative decade, marked by better positioning on domestic routes. Conditions have improved along with consolidation among airlines that is having the desired effect on profitability. If interested in reading further, take a look at previous postings, such as my April 3 blog and March 27 suggestions on finding the best airline stock to hold.
On that note, given the productivity improvements, those airlines with efficiency strategies remain some of the best holdings. In particular, Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings Inc (NYSE:UAL) are aiming to control capacity and should benefit from the upturn in demand.
Flying conditions good
Indeed, the outlook calls for air traffic growth to exceed increases in seating capacity during 2013. Let’s continue to use Delta Air Lines, Inc. (NYSE:DAL)’s numbers for reference: Delta Air Lines, Inc. (NYSE:DAL)’s domestic revenues advanced 6% in the March quarter, and the firm is planning to boost available capacity by only a couple of percentage points in the second quarter. Plus, internationally, travel to Europe has been robust, while Asian revenues would be healthy, it not for a weakened yen.
The real reason Delta Air Lines, Inc. (NYSE:DAL) remains a top pick, though, is its stronghold as the nation’s second-largest carrier and the actions it is taking to support growth. For instance, Delta is expanding and/or renovating its terminals at New York’s LaGuardia (LGA) and JFK airports. Indeed, since December 2011 it has expanded capacity at LGA 41%, adding 110 new flights and 27 destinations. Efficiency should be enhanced, too, by a decline in unit cost increases over the rest of this year.
Increasing demand should also help those airlines more reliant on economic expansion and consumer spending. These are the smaller, point-to-point airlines that mostly serve leisure destinations. For instance, JetBlue Airways Corporation (NASDAQ:JBLU), whose shares have taken a hit lately, could be in store for enhanced earnings, following a challenging first quarter. The buying opportunity should be considered by investors with above-average risk.
