The U.S. airline industry is on track for a profitable year after a long drought. Currently, airlines are benefiting from the rebound in traffic, including an increase in business travel and premium service demand. With signs of sustained economic growth, the International Air Transport Association (IATA) has more than tripled its full-year 2010 profit outlook to $8.9 billion for the overall industry compared with the earlier outlook of $2.5 billion.
Airline traffic is measured in billions of revenue passenger miles (RPM), which is the revenue generated for every mile a passenger flies. Unit revenue and capacity rose for most of the airlines in the month of September.
United Airlines, a wholly owned subsidiary of United Continental Holdings Inc. (UAL), reported an increase of 7.6% to 9.95 billion in September traffic, the largest growth relative to its peers. Capacity (or, available seat miles) and load factor (percentage of seats filled with passengers) rose 4.4% and 250 bps year over year, respectively. The company expects 13.5% to 14.5% year-over-year increase in unit revenue for the month of September, measured by passenger revenue per available seat mile (PRASM), a key metric in airlines.
United Airlines became the world’s largest airline following the merger with Continental Airlines, overtaking Delta Air Lines (DAL), which acquired Northwest Airlines in 2008. We expect United Airlines to enjoy a favorable position in an increasingly competitive global and domestic aviation industry and perform better than any airline alone. The company will likely have one of the best cash positions, industry-leading revenues and a competitive cost structure. Currently, we hold a positive stance on United Airlines.
Low-cost carrier Southwest Airlines Co. (LUV) recorded a 5.1% rise in September traffic on a capacity increase of 4.7% year over year. The month’s RPM increased to 6.1 billion compared with 5.8 billion in September 2009. Load factor inched up to 75% from the year-ago level of 74.7%. The company expects PRASM to increase 11% year over year for the month of September.
Our current Zacks Consensus Estimate for Southwest Airlines is 25 cents per share for the third quarter, compared with earnings of 3 cents per share in the year-ago quarter. If the company meets the Zacks Consensus Estimate, it would lead to a whopping 736.11% year-over-year growth. Similarly, for fiscal 2010, the current Zacks Consensus Estimate of 74 cents indicates a significant 287.97% year-over-year growth.
We believe Southwest Airlines is well positioned for growth attributable to its cost leadership position, strong balance sheet, low cost, flexibility, network optimization, increasing revenue initiatives and hedging. However, discounts on ticket prices, concerns on labor costs, fuel price volatility and technology investment by the company keep us on the sidelines.
Southwest Airlines recently announced a deal to acquire fellow discounter AirTran Holdings (AAI). Although the $3.4 billion merger has been approved by the boards of both companies, regulatory and shareholder approvals are still pending. The acquisition of AirTran represents a unique opportunity for Southwest Airlines to expand its presence in key markets such as New York LaGuardia, Boston Logan and Baltimore/Washington and will help it to gain a valuable market presence in Atlanta, the busiest airport in the U.S. We are currently maintaining our long-term Neutral rating on Southwest Airlines supported by our Zacks #3 (Hold) Rank.
Delta Air Lines, the second largest airline, reported a traffic increase of 6.5% year over year in September based on 6.6% capacity increase and stable load factor. Domestic traffic increased 5% year over year with a capacity increase of 7.8%. This was partially offset by a 210 bps decline in load factor. International traffic also increased 8.7% year over year, driven by 4.8% capacity increase and load factor growth of 320 bps to 86.5%.
Our current Zacks Consensus Estimate is 93 cents per share for the third quarter compared with 6 cents per share in the year-ago quarter. For full-year 2010, the current Zacks Consensus Estimate is $1.51, indicating a significant growth of 217.44% year over year.
We remain cautious on Delta Air Lines due to its debt-loaded balance sheet, unionized labor and rising fuel prices.However, we believe the successful integration of the Northwest merger, investments in new products and network, competitive cost structure along with an effort to strengthen the balance sheet will position Delta Air Lines to take advantage of the economic recovery. We are currently maintaining our Neutral rating on Delta Air Lines with the Zacks #3 (Hold) Rank.
September traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), rose 5.6% with capacity increase of 4.8% year over year and 60 bps increase in load factor. Domestic traffic spiked 1.6% on a 1.5% rise in capacity and international traffic upped 12.2% on a capacity increase of 10.1%. Currently, the stock has Zacks #3 Rank (Hold).
US Airways Group Inc.(LCC) said that its traffic rose 7.5% to 4.91 billion RPM in September. Capacity increased 3.8% and load factor shot up 280 bps year over year to 82.1%. PRASM is expected to increase 12% from the year-ago level. We are currently maintaining Zacks #3 Rank for the stock.
There is continued and sustainable demand for air travel in the near to medium term. We think the worst is over for the industry as overall economic conditions continue to show signs of improvement albeit at a slow pace.
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