Times have got increasingly better for airline companies as
Brent crude oil hit a new 14 month low on easing supply concerns.
Notably, falling crude
indicate lower jet fuel costs, thereby boosting the profitability
of airline companies.
On Monday, the Brent crude oil price fell by $1.93 to $101.60
while the West Texas Intermediate (WTI) crude oil slipped 94 cents
to $96.41 at the end of the day as Libya accelerates its oil
production and supply concerns over conflict in Iraq and Ukraine
eases. The declining oil prices drove most of the airline stocks on
Monday's trading session. Notably, United Continental Holdings (up
4%), American Airlines Group (up 3.75%) and Southwest Airlines (up
3.6%) were some of the major gainers.
Drop in Crude Price: A Blessing
The profit outlook of airline stocks depends largely on fuel
prices, the major variable component in the industry. According to
the International Air Transport Association (IATA) total fuel cost
for aviation companies will touch $212 billion in 2014 accounting
for almost 30% of the overall operating cost.
Hedging strategies are frequently used by airline companies to
cope with rising fuel prices. The carriers use a combination of
calls, swaps and collars at varying WTI crude-equivalent price
levels to hedge. However, the passenger carrier's, which have cut
their oil hedges will benefit most from the falling price
Strong Q2 Earnings
The airline sector had witnessed a soft first quarter due to
severe winter. However, the second quarter earnings have looked
much more promising as the current momentum in the macro economy
was complemented by strong fundamentals within the sector.
Most of the traditional and regional U.S. carriers have managed
to beat our second quarter 2014 earnings estimate with only JetBlue
reporting in line earnings, while Skywest missed the same. Solid
demand particularly from the business and leisure group of
travellers drove the result positively. The strong results have
prompted bellwethers like United Continental and American Airlines
to announce stock buybacks.
3 Airline Stocks to Buy Now
United Continental Holdings Inc.
) is one of the major carriers in the U.S. and operates through its
mainline and regional partners. It operates in the United States,
Asia-Pacific, Europe, Africa, the Middle East and Latin America and
has an approximate fleet of 700 aircrafts.
The Zacks Consensus Estimates for third-quarter 2014 is $2.29,
representing a robust year over year growth of 51.88%. The company
registered an average positive earnings surprise of 3.95% over the
trailing 12 months. This Chicago-based airline currently has a P/E
ratio of 10.74 and is trading at a significant discount to the
industry average of 20.20. United Continental Holdings spots a
Zacks Rank #1 (Strong Buy).
Southwest Airlines Co.
) is a Dallas-based airline that provides low-cost passenger air
transportation services in the U.S. It primarily provides
short-haul, high frequency, point-to-point airline services
covering many secondary or downtown airports such as Dallas Love
Field, Houston Hobby, Chicago Midway, Baltimore/Washington
International, Burbank (Los Angeles), Manchester (Boston), Oakland
and San Jose. As of Jun 30, 2014, Southwest operated 695 Boeing
aircraft and served 93 destinations in approximately 40 states.
The Zacks Consensus Estimates for third-quarter 2014 is 48
cents, representing a year over year growth of 41.54%. The company
registered an average positive earnings surprise of 12.84% over the
trailing 12 months. Southwest Airlines currently has a Zacks Rank
#1 (Strong Buy).
Spirit Airlines Inc.
) is a low fare airline based in Miramar, FL. The carrier operates
270 daily flights to 55 destinations across the U.S., Latin America
and the Caribbean. As of Jun 30, 2014 the company had a fleet of 57
single aisle aircrafts consisting of Airbus planes.
The Zacks Consensus Estimates for third-quarter is 98 cents,
representing a year over year rise of 23.84%. The company
registered an average earnings surprise of 9.20% over the trailing
12 months. Spirit Airlines holds a Zacks Rank #1 (Strong Buy).
What Lies Ahead?
According to International Energy Agency (IEA) crude oil price
is expected to remain subdued going forward owing to strength in
global oil supplies. The soft crude price will act as a catalyst
behind airline companies' further rise in profitability.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis
SPIRIT AIRLINES (SAVE): Free Stock Analysis
To read this article on Zacks.com click here.