Leaving behind the effects of an unstable oil price scenario and
sluggish world trade, the global airline industry is expected to
perk up through 2013 on improved passenger traffic and freight
volumes. This improved backdrop is reflected in the International
Air Transport Association's (IATA) projections for this year that
show the industry generating $10.6 billion in profits this year, up
from their earlier forecast of $8.4 billion.
Net profit margin is expected to be 1.6%, up slightly from the
previously estimated 1.3%.
North American airlines display strong growth prospects for the
coming months courtesy of disciplined capacity, rising travel
demand and a number of new and enhanced ancillary revenues. The
carriers are performing impressively in terms of customer service
including on-time arrivals, advanced baggage handling systems,
fewer customer complaints, lower cancellations and overbooked
As a result, these carriers are expected to generate $3.6
billion in profits in 2013, higher than $2.3 billion earned last
These carriers are expected to record a profit of $4.2 billion in
2013, much more than $3.9 billion recorded in 2012. The expected
boost in cargo performance will aid the profitability level.
Notably, this is the sector's highest profit-producing region
outside the home market.
Per IATA, profits from the Middle East carriers are expected to
grow to $1.4 billion compared with $900 million in 2012. The region
will likely witness strong traffic growth owing to expansion of
connectivity to emerging markets.
Profit projection for the Latin American carriers was pegged at
$600 million, almost double the 2012 profit. Growing demand and
capacity expansion initiatives will offset the volatility in the
African air carriers are expected to post profits of $100 million
this year, after a loss of $100 million in 2012. Over the last few
quarters, this territory has attracted immense attention, owing to
the untapped business opportunities it offers.
As for the European airlines, the IATA expects this year's profit
to reach $800 million versus $300 million in 2012. Although the
Eurozone woes will continue to linger, airline activities are
expected to improve based on robust services on long-haul routes to
Underlying Factors for 2013 Profits
In the base-case scenario, there are several dynamics that will act
as driving factors for the overall airline profits in 2013. These
Passenger & Cargo:
While economic instability in several regions like Europe and Latin
America will keep travel growth at check, markets in Asia, the U.S.
and the Middle East will continue to boost growth in the first half
of 2013. The IATA projects global airline passenger growth of 5.4%,
while cargo business will see expansion of 2.7%.
Coming to demand-supply balances, demand (measured in traffic) will
outpace capacity (combined passenger and cargo) as the year
advances. Capacity is expected to show an increase of 4.0% while
air travel demand is expected to see a 4.7% pickup.
Fuel Price Effect:
Airline profit outlook depends on fuel prices, the major variable
component in the industry. Average crude oil prices remained
relatively flat year over year at $94.05 per barrel in 2012. Lower
fuel price no doubt cuts the airlines' operating expenses, but it
also indicates a slowing economy and the consequent fall in global
air travel demand.
However, if pricing remains stable despite an uncertain
macroeconomic outlook, the carriers will likely experience better
profitability. The Association projects fuel cost of $216 billion
in 2013, accounting for 33% of the overall operating costs.
Service and Fleet Restructuring:
Most of the air carriers at large are scrapping or cutting flights
in many small and unprofitable airports in order to reduce their
fuel cost burden. The companies are also working on replacing old
and depleted airplanes with new and upgraded ones. Though initially
expensive, the new and improved aircraft are more fuel efficient
than the existing ones and will help in lowering operating and
In the coming two decades, global airlines are expected to invest
nearly $3.5 trillion to buy about 27,800 new airplanes. For this,
they are banking on top aircraft manufacturers such as
The Boeing Company
) and Airbus. Over the long run, the carriers aim to replace their
old narrow-body jets -- A320's/B757-200/300 -- with advanced
narrow-body airplanes such as A320 Neo and the 737 Max, enabling
better services to customers and maintaining equilibrium between
demand and supply.
United Continental Holdings Inc.
) ordered eight Boeing 737-900ERs aircraft and Qantas Airways
placed an order for five.
Ryanair Holdings plc
) inked a deal with Boeing to buy 175 new Next Generation 737-800
Hawaiian Airlines, Inc, a subsidiary of
Hawaiian Holdings Inc.
), entered into an agreement with Airbus to purchase 16 new A321
Neo aircraft between 2017 and 2020. The deal also has the option of
acquiring nine additional aircraft.
With flyers demanding comfortable and quality services along with
proper security, airlines are focusing on aircraft redesigning by
offering new and attractive products and services within the travel
Delta Air Lines Inc.
) recently launched new Fly Delta application for iPad users. The
company targets investing more than $2 billion through 2013 on
improved products, services and airport facilities in the air and
on the ground.
) is upgrading its 737-700 fleet with the new Boeing Sky Interior,
and renovating in-flight cabins and decorating interiors (known as
Evolve) to improve customer satisfaction and experience.
Additionally, the company is offering Row 44 WiFi technology-based
facilities like Live Television. The company is also expanding
seating capacities in Boeing 737-700s planes.
Hedging strategies are used by airline companies to cope with the
rising fuel prices. The carriers use a combination of calls, swaps
and collars at varying WTI crude-equivalent price levels to hedge.
Although U.S. airlines experienced sluggish growth over the last
few months, the demand for air travel is expected to nearly double
over the next 20 years, as predicted by the U.S. Federal Aviation
Administration (FAA). Passenger enplanements is expected to grow
2.8% to 757.2 million in 2014 and about 2.1% in the future years,
reaching $1.0 billion by 2027 and nearly $1.15 billion by 2033.
The FAA projects air traffic, customarily measured in billions of
revenue passenger miles (implying a unit of one mile flown by one
passenger), to grow many folds over the same period. Revenue
passenger miles will jump from 815 billion reported in 2011 to 1.46
trillion by 2033 at an average annual rate of 2.8%.
International traffic is forecasted to move up 4.0% per year,
reaching 402.9 million in 2033. Domestic travel will grow at a more
modest clip of 2.7% annually. This projection assumes a steady
economic recovery with no major headwinds like a large rise in oil
price, swings in macroeconomic policy or financial meltdowns.
Further, major North American airlines will raise capacity
(available seat miles) at an annual rate of 2.0%, reaching 1.06
trillion by 2033.
We believe industry consolidation and various ancillary revenues
will boost the profitability and cost performance of most air
carriers going forward. This is an opportune moment for companies
to consolidate in order to boost profits and enhance operational
Additional Revenue Gains:
A number of supplementary revenue streams helped the airline
industry gain ground in 2011 and 2012. Air carriers are adding
novel features to their services and expanding new products to
improve passenger satisfaction and experience. The IATA projects
total revenue of $671 billion for 2013.
With the aim of enhancing on-board entertainment choices for
flyers, Southwest Airlines announced the offering of on-demand
movies on flights. Additionally, the carrier is benefiting from the
All-New Rapid Rewards program and increased ancillary product
offerings such as EarlyBird check-in, unaccompanied minor travel
and pet fees.
Cathay Pacific, Malaysia Airlines, KLM, Delta, Qantas and British
Airways have also made
) iPad available to passengers in their lounges, rent them out in
the air as well as use them as a self-service kiosk, customer
survey tool and food ordering tool.
Passenger air transportation services provider
JetBlue Airways Corp.
) is experiencing solid growth given continued success in the
Getaways vacation package business, TrueBlue frequent-flier program
and Even More product offerings.
Moreover, the airlines are also persistently concentrating on
distinctive advertising and promotional activities with the help of
popular social media outlets that create brand awareness and
attract more passengers.
Mergers & Acquisitions:
Airline companies unite in order to restore lost profits and
broaden their perimeter. This was evident in the past three-mega
mergers of Northwest Airlines and Delta Air Lines in 2008, United
and Continental in 2010, and AirTran and Southwest in 2011. All
three companies -- Delta, United and Southwest -- are the long-term
beneficiaries on both capacity and cost fronts.
Currently, the biggest airline amalgamation that is creating waves
is the merger of
US Airways Group Inc.
) and American Airlines Inc, a subsidiary of
). In mid-February, the board of directors of both the carriers
gave a nod to the pending merger agreement, paving the way for the
largest global carrier. In early April, U.S. Bankruptcy Judge Sean
Lane gave his green signal for the $11 billion unification, by
turning down the application of a planned $19.9 million severance
package for Tom Horton, the outgoing CEO of AMR.
We see American Airlines-US Airways as the hottest pairing in the
industry, as it will be in the best interest of customers. This
collaboration will dethrone United Continental Holdings from its
current status of being the carrier of the highest number of
passengers. As a result, the newly formed airline -- American
Airlines Group Inc. -- will emerge as a successful candidate by
balancing its debt level and lowering costs.
Delta is attempting to acquire a 49% stake in British carrier
Virgin Atlantic for £224 million or $360 million from Singapore
Airlines. With this acquisition, Delta Airlines will gain more
control over one of the busiest air routes across the globe -- New
York to London. The deal will also hugely benefit customers with a
broader network of flights, enhanced connectivity and convenient
booking options. The companies have submitted an antitrust immunity
application with the U.S. Department of Transportation (DoT) for
their proposed joint venture.
Apart from these major acquisitions, various airline partnerships
and alliances are vital to the overall growth of the industry.
JetBlue remains focused on growing partnerships (codeshare,
interline, and baggage handling agreements) with both legacy and
international carriers in order to enhance its services and take
advantage of travel benefits.
The company has allied with several international companies,
including Cathay Pacific, Air China, the LOT Polish Airlines,
Turkish Airlines, Japan Airlines, Emirates, Hawaiian Airlines, Aer
Lingus and recently, entered into an alliance with South Korea's
prime carrier, Asiana Airlines.
North American carriers are making continuous efforts to increase
their domestic and international flights. Delta strengthened its
position in New York City by gaining market share in LaGuardia
airport. Moreover, the company along with Alaska Airlines, has
agreed to increase international service in the West Coast. This
move will take the airline closer to serving the key markets in
Asia as well as benefit flyers in the Pacific Northwest circuit.
In 2013, Southwest targets to introduce services to new and
unexplored domestic markets including Branson; Charlotte, Flint,
Rochester, Portland, Wichita and Grand Rapids. Further, the company
is looking to tap opportunities in the international market with
its debut in the Caribbean, Central America, Latin America and
Mexican markets by 2015.
While JetBlue continues to successfully expand its network in two
major growth regions: Boston, and Caribbean and Latin America,
Allegiant Travel Company
) is consistently introducing non-stop low-cost travel options
between various spots domestically.
Air carriers are opting for numerous technology upgrades and system
automation for various activities such as airline reservations,
flight operations and website maintenance. These upgrades allow the
companies to function effectively and efficiently, minimize
expenses and render better customer service.
The major outperformers are expected to be
Alaska Air Group Inc.
) and Allegiant Travel Company, which have a Zacks Rank # 2 (Buy).
We also like a few Zacks #3 (Hold) Rank stocks such as
Spirit Airlines Inc.
Bristow Group Inc.
), United Continental, Delta and Southwest.
Of the many challenges facing the industry, the most important ones
include volatile fuel prices, economic weakness, natural
calamities, government regulation, unionization, airport
infrastructure constraints and safety concerns.
Oil Price Volatility:
Fuel price volatility continues to be one of the significant
challenges, as fuel costs are largely unpredictable. Airline
carriers' ability to pass along the increased costs of fuel to its
flyers is limited by the competitive nature of the industry. Thus,
even a small change in fuel price can significantly affect
The airline business is labor intensive. Most of the employees are
unionized and depend on various U.S. labor organizations. The
relation between airlines and labor unions are governed by the
Railway Labor Act, which states that a collective bargaining
agreement between an airline and a labor union does not expire;
instead it becomes amendable as of a stated date. Failure to amend
terms and conditions suitably may lead to work stoppages or
strikes, and thereby hamper operations.
The airline industry is highly regulated, in particular by the
federal government. All companies engaged in air transportation in
the U.S. are subject to the regulations implemented by the
Department of Transportation. Further, airlines are also regulated
by the Federal Aviation Administration (FAA), a division of the
DoT, primarily in areas of flight operations, maintenance and other
safety and technical matters.
The air carriers are investing a lot of money to enhance their
products and services in order to make them competitive. However,
proper returns from these investments are uncertain or the timings
are unknown. The carriers have the possibility to lose the money
that was invested in the business for the new developments.
GOL Linhas A
), which have a Zacks Rank #4 (Sell), to underperform the broader
AMR CORP (AAMRQ): Free Stock Analysis Report
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DELTA AIR LINES (DAL): Free Stock Analysis
JETBLUE AIRWAYS (JBLU): Free Stock Analysis
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SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis
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