The global aviation industry holds a steady outlook for 2014 as
solid economic recovery and rising cargo demand lend optimism to
the sector. These outweigh the negative impacts of developments in
jet fuel price and growth concerns in emerging economies.
After surviving the 2008 financial scare, the ongoing economic
upturn is believed to be much stronger than that of 2012 and 2013.
The outlook is particularly favorable for the U.S. economy, with
GDP growth expected to materially improve from the pace of the last
While not much is expected from the Euro-zone, the region's
economy has definitely stabilized, lifting the clouds of the last
few years. On the flip side, reversal of capital flows into the
emerging economies in a post-QE world is expected to become a
challenge to the region's growth.
Air cargo volumes - an important indicator of business confidence -
are expected to continue trending up. The cargo business is
expected to see expansion of 4.0% in 2014, way above 1.4% growth
achieved in 2013.
This improved outlook is behind the positive projections from trade
groups. The International Air Transport Association (IATA) remains
cautiously optimistic on the industry and projects overall airline
profits of $18.7 billion for 2014, with 3.30 billion passengers in
The current profit forecast marks 5.1% deterioration from the
previous projection of $19.7 billion. Net profit margin is expected
at 2.51%, up from 1.82% estimated previously. The industry is
expected to generate $5.65 from every departing passenger on
average, quite a soft number for a high risk business.
With the world's largest economy improving, North American airlines
look brighter for 2014. Consolidation benefits, growing travel
demand and a number of new and enhanced ancillary revenues also
provide impetus. Although, performance will vary substantially
between different U.S. carriers, a strong 2013 has increased 2014
profit forecast to $8.6 billion.
Europe, which continues to recover slowly, will benefit from its
joint ventures with North Atlantic carriers, thus driving
profitability. IATA expects this year's profit to reach $3.1
billion versus $1.2 billion in 2013.
These carriers are expected to post profits of $3.7 billion in
2014, higher than $3.0 billion recorded in 2013. Strong passenger
and cargo demand will boost profitability.
Per IATA, profits from the Middle East carriers are expected to
grow from $1.6 billion in 2013 to $2.2 billion in 2014. The region
will likely witness robust traffic growth owing to strong passenger
demand. Cost control measures, joint ventures and product
innovations will drive profitability.
Latin America and Africa:
The region's profitability is expected to enhance 2.5 times from
$400 million in 2013 to $1.0 billion in 2014. The picture is
similar in Africa, where a profit of $100 million is forecasted
compared to a loss of $100 million in 2013.
Emergence of Several Airways in the Middle East
As the U.S. passenger carriers try to remain disciplined in
capacity additions, several Gulf-based airlines continue to fortify
their positions within the global airline industry. Emirates has
led the pack by expanding in Europe, Africa and the BRICS thus
making Dubai one of the largest international connecting hubs in
the world. Emirates' success was followed by two other regional
players namely Etihad Airlines and Qatar Airways, which are trying
to emulate the size and stature of the former.
The large-scale plane orders only confirm the long-term ambitions
of these airlines. The three Middle Eastern carriers already have a
much impressive fleet of wide bodied jets as compared to U.S.
carriers. These Gulf airlines have placed orders worth $162 billion
The Boeing Company
) and Airbus, deliveries of which are expected over the next
Emergence of these cash rich airline companies remains a concern
for the legacy carriers including the U.S. ones, which might lose a
chunk of their international market as most passengers continue to
move through the Gulf.
India - A Strong Long-term Opportunity
The aircraft manufacturing giant Airbus and Boeing have both raised
their 20-year outlook on India owing to the high appetite for
growth but low market penetration of airline services. Demographic
trends in India support the growth of air transportation service as
the country's working class population continues to rise. The
optimism swelled after Boeing received orders for 42 B-737 aircraft
from SpiceJet worth $4.4 billion, while Tata Groups' two airline
joint ventures with Singapore Airlines and Air Asia Berhad have
opted for Airbus' A-320 fleet.
According to Boeing's estimates, Indian carriers will buy 1,600
aircraft worth $205 billion between 2013 and 2032 compared to its
previous same-period projection of 1,450 planes valued at $175
billion. Boeing's counterpart Airbus has also raised its 2013-32
outlook to 1,290 aircraft valued at $190 billion from $1,045
billion planes at $145 billion. The aircraft manufacturing duo has
predicted that a significant part of the order will constitute
single-isled narrow bodied aircraft like Airbus A320 or Boeing
The long-term rosy picture is however partially offset by the
short-term weakness within India's aviation industry, which
continues to suffer from over capacity. High capacity as compared
to demand is forcing the carrier to fly with a lot of empty seats,
thus affecting load factor. Additionally, airfares have also surged
in the last five years resulting lower demand for air service.
Underlying Factors for 2014 Profits
In the base-case scenario, there are several dynamics that will act
as driving factors for the overall airline profits in 2014. These
Passenger & Cargo:
Solid air travel demand, growth in ancillary revenues and economic
recovery in Europe and North America are expected to drive growth.
IATA is projecting global airline passenger growth of 5.8% and
average industry load factor 80.2% this year. The improved
supply-demand balance globally is expected to result in modestly
lower passenger yield this year.
Fuel Price Effect:
Airline profit outlook depends on fuel prices, the major variable
component in the industry. For 2014, average
are expected to stay at $108.0 per barrel, lower than $111.8 per
barrel in 2012 and around $108.8 in 2013, primarily due to
increased fuel supply in North America. Lower fuel prices are
beneficial to airlines. But if the price reduction is due to weak
demand on account of economic issues, then it's a net negative for
Service and Fleet Restructuring:
many carriers are scrapping flights in small and unprofitable
airports in order to reduce costs, with bottom-line concerns
trumping market share gains. To that end, the companies are
replacing old and depleted airplanes with new and upgraded ones.
Though initially expensive, new and improved aircraft are more fuel
efficient than the existing ones and will help in lowering
operating and maintenance costs.
Over the next 20 years, global airlines are expected to invest in
excess of $4 to $5 trillion in fleet development. Apart from the
high demand from the oil rich Gulf nations, a major part of the
fleet demand will also be driven by China, India and continuous
expansion of low budget carriers around the world. For this, the
airlines are banking on top aircraft manufacturers such as The
) 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 A-321, A320 Neo and the B737 Max, for better
service and demand-supply equilibrium.
Delta Air Lines Inc.
) plans to replace two-third of its older 50-seat regional less
efficient aircraft with Boeing's 717-200 and 737-900 aircraft over
the next two year. This fleet is already generating superior
margins in markets where it is already deployed and expected to
further enhance domestic capacity.
With passengers demanding comfort and quality service along with
proper security, airlines are focusing on aircraft redesigning with
new and attractive products and services within the travel plan.
United Continental Holdings Inc.
) is offering premium flat-bed cabin seats on every long-route
international flights. Further, the carrier has installed in-seat
power on more than half of its mainline flights and has revamped
the interiors of most of its Airbus fleet. Delta also plans to
invest $750 million over the next two-year period to roll out Wi-Fi
as well as renovate the interiors of its narrow-bodied aircraft
over the next three years.
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.
U.S. Airlines - 20-Year Projection
Over the last few years, the global economy has been hit by a
recession in Europe, slow growth in China and volatile performance
by some emerging economies. Although U.S. airlines experienced slow
growth in the recent past due to these headwinds, these are
expected to improve in the long run as predicted by the U.S.
Federal Aviation Administration (FAA).
The U.S. airline industry is expected to remain profitable over the
next two decades given the improving worldwide economic activity.
An uptick in economic activity will fuel demand for airline
service. Passenger enplanement is expected to grow 0.8% to 745.5
million in 2014 and about 2.1% in the future, reaching $1.03
billion by 2028 and nearly $1.15 billion by 2034.
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 822.2 billion reported in 2012 to
almost 1.47 trillion by 2034 at an average annual rate of 2.7%.
International traffic is forecasted to move up at an average rate
of 4.2% per year, reaching 434.8 million in 2034. This projection
assumes steady economic recovery with no major headwinds like a
significant rise in oil price, changes in macroeconomic policy or
financial meltdowns. Further, major North American airlines will
raise capacity (available seat miles) at an annual rate of 2.1%,
reaching 1.75 trillion by 2034.
Zacks Industry Rank - Positive
Within the Zacks Industry classification, airlines are broadly
grouped into the Transportation sector (one of 16 Zacks sectors).
We rank all the 260-plus industries in the 16 Zacks sectors based
on the earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
As a point of reference, the outlook for industries in the top
one-third of the list (with Zacks Industry Rank #88 and lower) is
'Positive,' the mid one-third of the list (between #$89 and #176)
is 'Neutral', while the last one-third ( from #177 and above) is
The Zacks Industry Rank for the airline industry is currently #56,
implying that the outlook remains positive.
The broader Transportation sector, of which railroads are part,
reflects a stable growth pattern. So far, 100% of the sector
participants have reported fourth-quarter results, which have been
fairly good in terms of both beat ratios (percentage of companies
coming out with positive surprises) and growth.
In the fourth quarter, the transportation sector registered revenue
"beat ratio" of 54.5% and earnings beat ratio of 45.5%. Total
earnings for the companies in this sector grew 15.8% year over year
on 4.5% revenue growth. Earnings showed meaningful improvement from
13.2% in the third quarter 2013, while revenue growth was flat at
The Consensus earnings expectation is pegged at 19.9% for the first
quarter and 8.2% for 2014. The second quarter is expected to
register a modest earnings growth of 1.2%. The first quarter
revenue expectation is pegged at 4.8% while full-year growth stands
at 4.5%. The second quarter is expected to register revenue growth
For more details about earnings for this sector and others, please
read our latest '
We believe industry consolidation and various ancillary revenues
will boost the profitability and cost performance of most air
carriers going forward. This is a suitable time for companies to
consolidate for higher profits and operational efficiency.
Additional Revenue Gains:
A number of supplementary revenue streams helped the airline
industry gain ground in 2013. Air carriers are adding novel
features to their service and introducing products to improve
passenger satisfaction and experience. The IATA projects total
revenue of $745 billion in 2014.
Mergers & Acquisition:
Airline companies unite in order to restore lost profits and
broaden their perimeter. This was evident in the past mega mergers
within the industry involving Northwest Airlines and Delta Air
Lines in 2008, United Airlines and Continental Airlines in 2010 and
AirTran Holdings and
Southwest Airlines Co.
) in 2011. All three companies - Delta, United and Southwest are
long-term beneficiaries on capacity and cost fronts.
The recently merged U.S. Airways Group Inc. and American
Airlines Inc. have gained in size and capacity by creating the
largest global carrier
American Airlines Group Inc.
). Despite the merged entity having more pricing power and control
over a larger number of slots, we believe it will have little
effect on the dynamics of the U.S. aviation industry as 80% of the
same market will be dominated by the new American, United, Delta
North American carriers continuously strive to increase domestic
and international flights. United is planning an international
service between Los Angeles and Melbourne from Oct 2014. To expand
operations in Central America, United plans to operate flights
between Newark in New Jersey and Santiago in Dominican Republic
from summer 2014.
Delta Air Lines is strengthening its position in the western
coastal city of Seattle and is building it as an access point to
Asia. Meanwhile, Southwest is looking to tap opportunities in the
international market with its debut in three Caribbean markets in
Jul 2014. The company also aims to offer non-stop service to
several domestic destinations from Dallas Love Filed airport where
flight limitations will finally be lifted in Oct 14. The carrier
also expects to strengthen in markets like Memphis, Tennessee,
Cleveland, where rival carriers have downsized their operations.
JetBlue continues to successfully expand its network footprint in
major growth regions - Boston, Fort Lauderdale, the Caribbean and
Latin America. The company is banking heavily on the new services
offered from Fort Lauderdale to different locations in the
Caribbean and Latin America.
The merger between U.S. Airways and American Airlines has opened up
new opportunities for low budget carriers. As part of the agreement
with Department of Justice (DOJ), U.S. Airways and American need to
give up 52 take-off and landing slots at Washington's Reagan
National Airport (DCA) and 17 pairs at New York's LaGuardia Airport
(LGA). Further, the carriers have to divest two gates and related
facilities at each of the Boston, Chicago, Dallas, Los Angeles and
Carriers like Southwest, Virgin Atlantic and JetBlue have reaped
the most benefit of these slot divestments. Southwest has been the
beneficiary at both DCA and LGA winning 27 and 12 pairs
respectively, while JetBlue won 20 such pair slots at DCA,
including 8 that it has leased from American Airlines. Virgin
America has won the remaining 5 pairs of slot at LGA. Both
Southwest and JetBlue have announced their intentions to expand
from DCA, with the former planning 40 daily departures, while the
latter targeting 24 daily services from the airport.
Air carriers are opting for numerous technology upgrades and system
automation for various activities such as airline reservation,
flight operations and website maintenance. These upgrades allow the
companies to function effectively and efficiently, minimize
expenses and render better customer service.
Carriers like Cathay Pacific, Malaysia Airlines, KLM, Delta, Qantas
and British Airways have made Apple's 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.
Meanwhile, United Airlines has installed satellite-based first-ever
Wi-Fi service for flyers on any long-haul international route and
is presently available on nearly 170 flights.
Emergence of Smaller Carriers
Although consolidation within the U.S. aviation industry will
reduce competition, it is expected to be short lived because of the
low barriers to entry within the same. Further, the rising profit
margins within the industry have allowed the smaller operators to
expand. The most aggressive of these has been
Spirit Airlines Inc.
), which plans to double its fleet size by 2017.
These ultra-low fare carriers are gaining popularity by providing
low cost options for domestic travelers, thus gaining popularity
among low end customer. Other small carriers like
Allegiant Travel Company
) and Frontier Airlines Group Inc. along with Spirit could capture
a greater market share if they continue with their present
The major outperformer will be American Airlines and
Alaska Air Group Inc.
), that have a Zacks Rank #1 (Strong Buy). We also like a few Zacks
#2 Rank (Buy) stocks such as JetBlue Airways, Southwest Airlines,
Hawaiian Holdings Inc.
Copa Holdings SA
). United Continental and Allegiant currently hold a Zacks Rank #3
Of the many challenges facing the industry, the most crucial ones
include slow economic recovery, volatile fuel prices, natural
calamities, industry consolidation, government regulation,
unionization, airport infrastructure constraints, technological
investments and safety concerns.
Pitfalls of Industry Consolidation:
Over the last few years, the U.S. aviation industry has seen
several consolidations with the most significant ones being U.S.
Airways with American Airlines in 2013 and Continental with United
in 2010. With major and legacy airlines of the U.S. joining forces,
the total number of carriers operating within the industry is
becoming less. This has resulted in less competition, higher
airfares and increased fees, thus affecting the flyers.
Smaller airlines could also be dominated by their bigger
counterparts, which will try to drive them away either via price
competition or through strategic acquisitions. Frontier Airlines
became the recent target when it was acquired by Phoenix-based
private equity firm Indigo Partners LLC.
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 restricted by the competitive nature of the industry.
Although fuel price is currently stable, any significant
geo-political issue in the oil producing country can 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. Similarly, the
airline industry in rest of the world is also exposed to labor
related concerns − proved by the ongoing pension-related dispute of
Aer Lingus and its largest trade union.
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 (DoT).
Further, airlines are also regulated by the Federal Aviation
Administration, a division of the DoT, primarily in areas of flight
operations, maintenance and other safety and technical matters. The
new stringent pilot duty and rest rules under FAR117 will increase
the carriers' expense as the companies need to hire more pilots to
comply with the aforementioned rules.
The air carriers are investing a lot of money to enhance their
products and services to gain a competitive edge. However, returns
from these investments are uncertain.
Technological investment is a key expense for air carriers. The
profitability of airlines could be affected by technology glitches
or failure to invest in new technologies. The most prominent
example is an electrical system problem in Boeing 787 Dreamliner
stemming from its lithium-ion batteries, which can affect the
buyers of these mega carriers.
Republic Airways Holdings Inc.
), to underperform the broader market. Both hold a Zack Rank #5
ALLEGIANT TRAVL (ALGT): Free Stock Analysis
ALASKA AIR GRP (ALK): Free Stock Analysis
BOEING CO (BA): Free Stock Analysis Report
COPA HLDGS SA-A (CPA): Free Stock Analysis
DELTA AIR LINES (DAL): Free Stock Analysis
EMBRAER AIR-ADR (ERJ): Free Stock Analysis
HAWAIIAN HLDGS (HA): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
SPIRIT AIRLINES (SAVE): Free Stock Analysis
SKYWEST INC (SKYW): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis
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