Seven months into 2013, the outlook for the global airline
industry looks bright for the balance of the year, owing to the
economic recovery in North America, a steady rise in demand and
effective cost-control measures.
The International Air Transport Association (IATA) projects overall
airline profits of $12.7 billion for 2013, with 3.13 billion
passengers in total. The forecast is higher than the previous
estimate of $10.6 billion. Net profit margin is expected at 1.8%,
up slightly from 1.6% estimated previously.
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, and lower cancellations and overbooked
flights. As a result, these carriers are expected to generate $4.4
billion in profits in 2013, up from $2.3 billion earned last year.
These carriers are expected to record a profit of $4.6 billion in
2013, much more than $3.9 billion recorded in 2012. The boost is
expected from China, Japan and long-haul markets on upbeat trade
flows and business activities. This will partially balance the
effects of the regional sluggish cargo markets.
Per IATA, profits from the Middle East carriers are expected to
grow to $1.5 billion compared with $900 million in 2012. The region
will likely witness strong traffic growth owing to expanded
connectivity to emerging markets.
Latin America: Profit projection for the Latin American carriers is
pegged at $600 million, almost double the 2012 profit. Growing
demand and capacity expansion stemming from increased trading and
business flows with Asia and North America will offset the
volatility in the domestic scenario.
As for the European airlines, the IATA expects this year's profit
to reach $1.6 billion versus $300 million in 2012. Lingering
effects from the Euro-zone crisis are not expected to abate for
quite some time, overall demand will likely stabilize due to better
activities in North Atlantic market and certain European areas.
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.
Underlying Factors for 2013 Profits
In the base-case scenario, there are several dynamics that will act
as driving factors for the sector's profits in 2013. These include:
Passenger & Cargo:
While economic instability in several regions like Europe and Latin
America will keep travel growth in check, markets in Asia, the U.S.
and the Middle East will continue to boost growth in the second
half of 2013. The IATA projects global airline passenger growth of
5.3%, while cargo business will see an expansion of 1.5%. The
average industry load factor is expected at a record level of
Coming to demand-supply balances, demand (measured in traffic) will
outpace capacity as the year advances. While the projected capacity
increase is 4.3%, air travel demand will likely see a 5.3% pickup,
resulting in a modest 0.3% growth in passenger yields this year.
Fuel Price Effect:
Airline profit outlook depends on fuel prices, the major variable
component in the industry. For 2013, average oil prices are
expected to stay below last year's level, primarily due to
increased fuel supply in North America. 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
However, if pricing remains stable despite an uncertain
macroeconomic outlook, the carriers will likely experience better
profitability. The Association projects fuel cost of $214 billion
in 2013, accounting for 31% of the overall operating costs.
Service and Fleet Restructuring:
Most of the air carriers at large are scrapping flights in many
small and unprofitable airports in order to reduce their cost
burden that has increased 55% over the period 2006-2013. The
companies are also 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.
Leading passenger carrier
Delta Air Lines
) disclosed plans to shrink operations at the Memphis, TN hub due
to low financial gains. This initiative falls under Delta's
strategy to trim its operating expenses and achieve the targeted $1
billion in cost savings over the next few years.
Over the next 20 years, global airlines are expected to invest
nearly $4 trillion to $5 trillion for fleet development. For this,
the airlines are banking on top aircraft manufactures 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 B737 Max, for better
service and demand-supply equilibrium.
United Continental Holdings Inc.
) agreed to buy 30 Embraer 175 regional jets. The deal, estimated
at about $4 billion, also has the option of 40 additional
purchases. Additionally, the airline placed a purchase order for 35
jets with Airbus for an undisclosed amount. Per the agreement,
Airbus will convert United's existing order of 25 A350-900s into
A350-1000s as well as deliver 10 new A350-1000s starting 2018.
Ryanair Holdings plc
) inked a deal with Boeing to buy 175 new Next Generation 737-800
airplanes for approximately $15.6 billion.
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
United Continental is aiming to increase the number of 180-degree
flat-bed seats and a personal on-demand entertainment system for
its premium cabin passengers of long-route international flights.
This will provide flyers an added level of privacy and comfort
along with multi-course meals and complimentary wine plus personal
) 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.
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
Very long-term projections are by their very nature uncertain, but
the U.S. airline industry is expected to remain profitable over the
next two decades given the improving worldwide aviation trends.
However, growth may be held back until 2015 due to volatility in
fuel prices and the ongoing economic headwinds, particularly in
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 are expected to grow
2.8% to 757.2 million in 2014 and about 2.1% in the future,
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 2.8% 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.
Zacks Industry Rank
Within the Zacks Industry classification, airlines are 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 airline industry is currently #160,
implying that it is in the mid-range of all industries ranked. This
highlights a mixed outlook for the industry in the near term with a
number of long-term positive factors offset by near-term challenges
on the earnings front.
The airline industry falls under the broader transportation sector
that displays stable growth in earnings. The first and second
quarter results of 2013 were impressive for the sector in terms of
both beat ratios (percentage of companies coming out with positive
surprises) and growth.
The earnings "beat ratio" was 87.5%, while the revenue "beat ratio"
was 37.5% in the first quarter. Total earnings for this sector
increased 3.3% and total revenue grew 3.1%.
With some results for the second quarter still to be released, we
expect earnings to register growth of 3.6% while there will be an
improvement of 2.9% on the revenue front.
For the months ahead, earnings are expected to grow 11.0% in the
third quarter of 2013 and 12.8% in the fourth quarter, thereby
reaching full-year 2013 growth of 10.3%. For revenue, growth will
likely be 4.6% in the September quarter, followed by 5.0% in the
fourth quarter. Full-year revenue will likely increase 4.1%.
For more details about earnings for this sector and others, please
read our 'Earnings Trends' report.
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 for higher profits and operational efficiency.
Additional Revenue Gains:
A number of supplementary revenue streams helped the airline
industry gain ground in 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 $711 billion for 2013.
United Continental introduced a new benefit program -- MileagePlus
Small Business Network. This initiative is part of United's
award-winning loyalty program, MileagePlus. It is the first travel
loyalty program in the U.S. that allows businesses to earn and
To bring in incremental revenue, Atlanta-based Delta Air Lines
announced the launch of new nonstop seasonal flights between Fargo,
ND and Atlanta every Saturday from Dec 21. The airline unveiled the
service to tap growing demand in the northern part of the nation to
connect with the warmer places in Southeast and Latin America
during winter. This new flight system will give flyers in the North
Dakota region easy access to numerous destinations all over the
nation and overseas across Atlanta.
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 will be offering
vitaminwater as an option to premium beverages.
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.
Moreover, the airlines continue to focus 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 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 in 2011. All the three
companies -- Delta, United and Southwest -- are long-term
beneficiaries on 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
). The merger will likely to be completed within the next few
months, with the European Union's (EU) approval expected in the
coming days. In mid Feb, the board of directors of both the
carriers gave their nod to the pending merger agreement, paving way
for the largest global carrier.
We see American Airlines-US Airways as the hottest pair 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.
Another leading U.S. airline, Delta Air Lines successfully
completed the acquisition of a 49% stake in British carrier Virgin
Atlantic from Singapore Airlines. This partnership entitled Delta
and Virgin Atlantic to gain 36% access to the New York-London
travel route, second to the 51% control exercised by a partnership
of AMR's American Airlines and British Airways.
The alliance will hugely benefit customers with a broader
network of flights, enhanced connectivity and convenient booking
options. Reaping advantages of the deal, Delta launched a daily
nonstop service between Seattle and London, scheduled to commence
from Mar 29, 2014.
Apart from these major acquisitions, various airline partnerships
and alliances are vital to the overall growth of the industry.
JetBlue Airways Corporation
) 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
The company has allied with several international companies
including Cathay Pacific, Asiana Airlines, the LOT Polish Airlines,
Turkish Airlines, Japan Airlines, Emirates, Hawaiian Airlines, Aer
Lingus and recently, entered into an alliance with South African
Expansion: North American carriers continuously strive to increase
domestic and international flights. Delta Air Lines 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 new and unexplored domestic markets
including Branson; Charlotte, Flint, Rochester, Portland, Wichita
and Grand Rapids. Further, the company is also looking to tap
opportunities in the international market with its debut in the
Caribbean, Central America, Latin America and Mexican markets by
While JetBlue continues to successfully expand its network in two
major growth regions -- the Caribbean and Latin America -- as these
comprise almost one-third of the company's total network.
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 reservation,
flight operations and website maintenance. These upgrades allow the
companies to function effectively and efficiently, minimize
expenses and render better customer service.
JetBlue Airways is set to introduce custom-equipped iPads for
pilots on-board. This will replace the heavy paper manuals during
flight phases, resulting in reduction of weight on the plane and in
turn fuel saving as well as lower printing costs. Additionally,
pilots will have more real-time capabilities in the cockpit plus
better technological support.
This follows American Airlines that launched the Electronic Flight
Bag program, whereby pilots will utilize tablets during flights.
The major outperformers will be
Hawaiian Holdings Inc.
) and US Airways Group, Inc. that have Zacks Rank #1 (Strong Buy).
We also like a few Zacks #2 (Buy) Rank stocks such as
Ryanair Holdings plc
Spirit Airlines, Inc.
). United Continental, Delta Airways and Southwest carry a Zacks
Rank #3 (Hold).
Of the many challenges facing the industry, the most crucial 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 (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 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. In fact, the carriers
investing in new developments could even end up losing money.
GOL Linhas A
Republic Airways Holdings Inc.
), which have a Zacks Rank #4 (Sell), to underperform the broader
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