Airline stocks have enjoyed big gains over the last year, as the market anticipated the recovery in airline earnings. However, you should still keep airline stocks on your investment radar because industry conditions are improving, and that should lead to strong revenue and earnings growth for the next few quarters.
After an awful 2009, airlines are experiencing stronger demand for flights as many return to air travel for business and pleasure. Indeed, the airlines have said that they expect the summer season to be strong.
That continued strength should allow airlines to generate impressive earnings growth well into next year. With many airline stocks trading with single-digit P/E multiples, there is still room for their stocks to run from here.
Supply and Demand
The global recession made business conditions extremely difficult for airlines. The economic slowdown caused people to fly less, and airline revenues declined. The severity of the recent recession drove several domestic and international carriers out of business.
While that was bad news for those companies, it ended up being good news for the airlines that survived the downturn. With fewer airlines to compete for passengers, the airlines were able exert and maintain pricing power. This is clearly evident with today’s ticket prices compared to last year, and that airlines are now charging for things like baggage that were previously included with the price of a ticket.
In addition, airlines are doing a much better job of filing up their planes. It is rare to see more than a few empty seats on flights nowadays. Full planes coupled with full-price tickets generate higher revenues and higher profits for the airlines.
Business Travelers
Business travelers are the real growth driver of airline revenues and profits. Business travelers account for less that half of all travelers, but they account for over two-thirds of airline revenues. During 2009, Corporate America cut costs like never before, and business travel was an easy way to cut costs. The decline in business travelers was disastrous for the airline industry.
With the economy bouncing back, companies are back to sending their employees on the road. Short of the economy falling into a double-digit recession, business travel should continue to gain momentum. That should help airlines deliver strong, profitable growth.
Consolidation
The current climate is ripe for consolidation in the airline industry.
In 2008, Delta Airlines and Northwest Airways combined to create the largest airline in the U.S. More recently, US Airways and United Airlines were in merger discussions before United decided to combine with Continental in May. If approved by regulators, United/Continental would become the largest airline in the world.
Mergers and acquisitions allow companies to cut costs by eliminating overlapping departments like accounting, human resources, or management. More important for the airline industries is that consolidations reduce capacity. This means fewer flights, fewer seats, higher ticket prices, and more tickets sold per flight. In other words, it means pricing power.
Of course, airline consolidations need regulatory approval because the reduced competition could lead to higher prices for consumers. However, regulators may be inclined to accept higher ticket prices if those airline mergers can prevent future bankruptcy filings, which seem to occur in every downturn.
Four Airline Stocks Cleared for Take-off
Continental Airlines (CAL)
At the end of 2009, Continental Airlines owned or leased 337 mainline jets and 264 regional aircraft. It flew to 118 domestic and 124 international destinations. The company operates its domestic route system primarily through its hubs in Newark, Houston, and Cleveland.
In the last month, the 2010 Zacks Consensus Estimate is up 17 cents, or 5.4%, to $3.31, and the Zacks Consensus for 2011 is up 20 cents, or 5.1%, to $4.09.
Continental is a Zacks #2 Rank stock is up about 160% in the last twelve months, and its shares trade at 7x 2010 consensus EPS estimates and 6x 2011 consensus estimates.
Delta Air Lines (DAL)
Delta provides scheduled air transportation for passengers and cargo in the U.S. and internationally. The company operates from airports in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Paris, Amsterdam, and Tokyo.
In the last month, the Zacks Consensus for 2010 is higher by 5 cents, or 2.9%, to $1.77, and the 2011 Zacks Consensus is up 21 cents, or 10.2%, to $2.26.
Delta is a Zacks #1 Rank stock that trades at 8x 2010 consensus EPS estimates and 6x 2011 consensus estimates. Its stock is up 110% in the last year.
Southwest Airlines (LUV)
Southwest Airlines is a domestic passenger airline. At December 31 2009, Southwest operated 537 Boeing 737 aircraft and provided service to 68 cities in 35 states.
In the last two months, the Zacks Consensus Estimate for 2010 is up 16 cents, or 28.1%, to $0.73. The Zacks Consensus for 2011 is higher by 24 cents, or 33.3%, to $0.96.
Southwest is a Zacks #3 Rank stock that trades at 17x 2010 consensus EPS estimates and 13x 2011 consensus estimates. LUV shares have increased 83% over the last twelve months.
US Airways (LCC)
US Airways provides air transportation for passengers and cargo. It operates approximately 3,000 flights daily to 190 communities in the U.S., Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America
In the last month, the Zacks Consensus Estimate for 2010 increased 36 cents, or 22.6%, to $1.95, while the Zacks Consensus Estimate for 2011 increased 67 cents, or 34.9%, to $2.59.
The Zacks #2 Rank stock trades at 5x 2010 EPS estimates and 4x 2011 EPS estimates. The stock is up 105% in the past year.
