The U.S. carriers recorded an improvement in traffic during May. The carriers are combating rising fuel prices by increasing fares and charging extra fees, which are in turn leading to higher revenues.
Airline traffic is measured in billions of revenue passenger miles (RPM), which implies one mile flown by one passenger.
The consolidated Maytraffic dipped 0.3% at thelargest U.S. airline United Continental Holdings Inc. (UAL), the only carrier that saw a drop in the month. Domestic traffic fell 1.7% while international traffic grew 1% from May 2010.
The 0.6% reduction in capacity (or available seat miles) was partially offset by a 20 basis point (bp) year-over-year increase in the load factor (percentage of seats filled with passengers). United Continental expects 14% to 15% year-over-year increase in unit revenue for the month of May, measured by passenger revenue per available seat mile (PRASM), a key metric in airlines.
We believe United Continental will continue to benefit from merger synergies, a global network, strong competitive positioning, low costs, fleet optimization and strong liquidity position. The trend of combating rises fuel prices with higher fares is also likely to continue. In addition, United Continental hedges its fuel position that restricts its losses and provides increased profitability. However, we believe rising fuel prices might stall the ongoing revival in the airline industry. United Continental has scrapped plans to boost capacity by 2% this year to keep it similar to 2010.
The Zacks Consensus Estimate for the second quarter is $1.66, representing a decline of 15.01% from the year-ago quarter. We believe the sentiment over the stock has improved over the last 30 days. The magnitude of the Zacks Consensus Estimate has been increased by 2 cents in the last 30 days.
Delta Air Lines Inc. (DAL), the second largest U.S. airline, reported a 2.2% year-over-year traffic increase in May aided by both domestic and international markets. On a year-over-year basis, consolidated capacity grew 2.2% while the load factor was flat at 83.9%. Domestic traffic inched up 1.9% year over year on capacity growth of 0.4% and a 130 bp increase in load factor. International traffic rose 2.6% year over year on a 5% capacity increase, partially offset by a 200 bp decline in load factor.
Delta Air Lines is cutting capacity to cope with persistently rising fuel prices and changing dynamics in air travel demand. The company plans to trim its capacity by 4% post Labor Day and offered worker buyouts for the first time since 2009. On the other side, steeply rising fuel prices are expected to increase Delta’s 2011 fuel expenses by $3 billion or 35% over the last year, thereby hurting its profitability. Although the aggressive fare hike actions and capacity cuts will help Delta to counter higher fuel costs, it might hurt revenue and profitability throughout 2011.
The Zacks Consensus Estimate for the second quarter is 55 cents, representing a decline of 15.69% year over year. The estimate remained unchanged in the last 30 days.
Following the merger of AirTran Holdings, the low-cost carrier Southwest Airlines Co. (LUV) recorded the largest increase of 10.6% year over year in May traffic, compared to its rivals, on a capacity increase of 4.2%. The month’s RPM increased to 9.2 billion from 8.3 billion in May 2010. Load factor grew to 82.7% from the year-ago level of 77.9%. The company expects PRASM to increase 11% to 12% year over year for May 2011.
We expect Southwest to report strong revenue growth and impressively control costs in 2011 as it continues to explore and plan revenue-producing opportunities, thereby improving its earnings prospect. The company is benefiting from increased ancillary product offerings such as EarlyBird check-in, unaccompanied minor travel and pet fees, WiFi connectivity, new reservation system, and new Rapid Rewards. Further, the merger of AirTran, completed on May 2, will provide healthy returns based on expected synergies and benefits and improve its revenue and operating income with the introduction of its services to new and unexplored domestic markets and debut in the Caribbean and Mexico markets.
The Zacks Consensus Estimate for the second quarter is 22 cents, representing a decline of 23.79% year over year. The Zacks Consensus Estimate has been increased by a penny in the last 30 days.
May traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), rose 1.3% year over year on a capacity increase of 0.7% and a load factor increase of 50 bps. Strong international traffic (up 4.9%) was partially offset by weak domestic traffic (down 0.9%).
We believe air carriers might hit rough weather in the days ahead. The IATA cut its 2011 overall profit outlook by a massive 54% to $4 billion due to rising fuel prices as well as the ongoing turmoil in Japan, North Africa and the Middle East. This is the second time the IATA reduced its profit forecast in the last 6 months. Now, U.S. carriers are expected to generate profits of $1.2 billion compared with the prior outlook of $3.2 billion provided in March.
We are currently maintaining our long-term Neutral rating supported by the Zacks # 3 (Hold) Rank on Delta Air Lines, United Continental and Southwest Airlines. AMR Corp. also retains a short-term Hold rating with the Zacks # 3 Rank.
AMR CORP (AMR): Free Stock Analysis Report
DELTA AIR LINES (DAL): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
Zacks Investment Research
