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.
Shares of Southwest Airlines Co. (NYSE:LUV), which have soared dramatically this year, may have more upside. Not having had the impact of higher air travel in its latest quarter, it too ought to see its profitability accelerate.
The two (JetBlue Airways Corporation (NASDAQ:JBLU) and Southwest Airlines Co. (NYSE:LUV)) are pursuing somewhat different strategies at this time. JetBlue Airways Corporation (NASDAQ:JBLU) is still one of the most aggressively expanding airlines, with Boston and the Caribbean as its two focal points of late. Southwest Airlines Co. (NYSE:LUV) is counting on the integration of its AirTran acquisition for upside. Each may be on track for more earnings stability and growth, given a conducive environment.
Fuller planes
Measures by consolidating air carriers, most notably United Continental Holdings Inc (NYSE:UAL), to keep supply under previous levels will likely lift airline profits. That carrier, in the process of implementing the integration of Continental, is apt to realize top-line and cost synergies, not to mention the means to adjust fares upward. Revenue yields are a byproduct of increased load factors that have a substantial effect on income. To what extent this occurs may reflect lesser competition, as well.
This brings up another sizable airline, set to soon merge with American Airlines, namely US Airways Group Inc (NYSE:LCC). While wrestling for market share among the major U.S. airlines, US Airways Group Inc (NYSE:LCC) might well also build upon its presence in the U.S. market, be it transcontinental or along the East Coast.
Cost environment
Margins are on track to be at their widest since 2010 this year, based on a drop in oil prices, in addition to the improved structure. The paring down of fleet sizes, or expansion plans for that matter, has allowed airlines to cut out unprofitable routes. Measures such as return on assets and returns on capital are apt to gain steam.
Summing it up
The IATA hiked its North American airline 2013 profit forecast by more than 20%. Corporate and leisure spending on flying seems to be growing. Plus, restructurings are stabilizing the cost bases of major carriers. It has been the goal of airlines to achieve more consistently positive financial results and external factors that have emerged of late can only be favorable in terms of that plan.
Accordingly, those that have shied away from air transport stocks in the past due to economic and fuel factors may want to reconsider. Competitive pressures have given way to, at least for now, an era of efficiency and growth, so long as the environment cooperates.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. Damon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article How Summer Airline Earnings May Shape Up originally appeared on Fool.com is written by Damon Churchwell.
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