The lingering economic uncertainty and inflating fuel costs might have dampened several sectors, but these challenges have failed to unnerve the U.S. air carriers. Despite the headwinds, the U.S. air carriers are providing excellent services to their passengers. They are performing at their record levels when it comes to on-time performance, baggage handling, fewer customer complaints, lower cancellations and overbooked flights.
Airlines appear to be well placed against the backdrop of higher fares, new advertising rules and capacity cuts.
The Efficient Steps
Fuel prices, though high, remain well below the 2008 level of over $140 per barrel that had ravaged the airlines industry. The carriers are taking profitable actions to endure the current crisis. They are successfully passing on the increased cost to customers in the form of fare hikes and effectively using fuel-hedging strategies to combat the rising fuel prices.
Apart from cutting capacities, air carriers are adding novel features to their services, as well as introducing new products. These measures will fuel revenue growth and reduce non-fuel costs, thereby driving future profitability.
The Costs Before Flying
Nevertheless, the addition of new services and products involve a huge amount of spending, which might restrict the carriers’ profitability in the near term.
Moreover, the carriers are focusing on fleet rightsizing. Though initially expensive, this seems to be the correct strategy to lower non-fuel costs. Air carriers are replacing their older fleet, which are no longer practical in a fuel-expensive environment, with the latest fuel-efficient aircraft.
Unfortunately, the increased expenses will take a toll for now and the airlines are expected to report loss in the first quarter. Southwest Airlines Co. (LUV), the largest U.S. low-cost carrier, will kick-start the earnings reports in the sector when it comes out with its results on April 19. (Read our full coverage on the earnings preview report: Earnings Preview: Southwest Airlines)
The largest U.S. airline United Continental Holdings Inc. (UAL) and the second-largest U.S. airline Delta Air Lines Inc. (DAL) is slated to release its earnings on April 26 and April 25, respectively. One of the leading low-cost airlines JetBlue Airways Corporation (JBLU) will report first quarter earnings on April 26.
Cashing In on the Opportunity
We believe any fall in the share prices of these major carriers, ahead of the expected earnings results, points to the good entry level validating attractive valuations. Increasing demand for global air travel and a concomitant rise in fares justify our optimistic thesis on the airline companies.
We are currently maintaining our long-term Neutral recommendation on Delta and JetBlue, and Underperform rating on United Continental and Southwest. For the short term (1-3 months), Southwest and JetBlue retain the Zacks #3 Rank (Hold) while Delta and United Continental holds Zacks #4 Rank (Sell) and #5 Rank (Strong Sell), respectively.
To read this article on Zacks.com click here.
Zacks Investment Research
