The major threats to the airline industry are escalating fuel prices, currency headwinds and a persistent slowdown in economic growth that is leading to lower global profits. All the chaos stems from the Euro-zone sovereign debt crisis, which has dwarfed economic growth all over the world and impaired funding for capital-intensive projects.
In the current scenario, passengers are demanding high quality services with proper security. Airlines are using obsolete, old and less-fuel efficient aircraft, flying which are no longer feasible in a fuel-expensive environment. Hence, this is the right time for the air carriers to introduce the best aircraft.
Though initially expensive, the new aircraft are more fuel efficient than the existing ones thereby lowering operating and maintenance costs. Global airlines are expected to invest $3.5 trillion to buy 27,800 new airplanes, having seating capacity of more than 100, over the next 20 years (2011-2030).
New airlines business, advanced technology and dynamic growth of air travel in emerging markets throughout the world are boosting the demand for these airplanes. About one-third of the demand is expected to come from Asia, which currently accounted for 28% of global air passengers.
The demand in Europe and U.S. are expected to fall to 23% and 20% by 2030, respectively, from the current 27% that each enjoy. A slow moving U.S. economy and the threats of a recession looming large over Europe are suppressing the demand for air travel.
Airbus, the world’s leading aircraft manufacturer, will deliver the largest number of aircraft to the airline companies followed by The Boeing Co. (BA). U.S. air carriers like Delta Air Lines Inc. (DAL), United Continental Holdings (UAL), JetBlue Airways Corporation (JBLU) and Southwest Airlines (LUV) have started buying new planes from these manufacturers in order to provide good customer service. The progress thus attained would help these companies to regain their lost profits.
Further, air carriers are adding new features to their services as well as expanding new products to improve passenger satisfaction and experience. Carriers are upgrading their fleet with Boeing Sky interiors such as flat bed seats and going wireless with the in-flight entertainment systems.
We currently have our long-term Neutral recommendations on Delta, United Continental, Southwest and JetBlue. For the short term (1-3 months), JetBlue retains the Zacks #2 Rank (Buy) while the rest have the Zacks #3 (Hold) Rank.
To read this article on Zacks.com click here.
Zacks Investment Research
