The U.S. airline industry is expected to remain profitable over
the next two decades given the increasing worldwide trends in air
travel. However, growth would be held back until 2015 due to
surging fuel costs and economic uncertainties in the U.S. and
Europe.
Travel to Spur Air Traffic Growth
Although U.S. airlines will see a small dip this year, the
demand for air travel would double over the next 20 years, as
predicted by the U.S. Federal Aviation Administration (
FAA
).
Passenger demand is expected to remain stable or increase
slightly this year to 732 million. Thereafter, it would grow 2% to
746 million in 2013 and about 3% in future years reaching $1
billion by 2024 and $1.2 billion by 2032.
The FAA projects air traffic, customarily measured in billions
of revenue passenger miles, implying one mile flown by one
passenger, to grow by more than 90% over the same period. Revenue
passenger miles would jump from 815 billion reported last year to
1.57 trillion by 2032 at an average annual rate of 3.2%.
International traffic is expected to grow wider than domestic
travel bounding 4.2% per year while the latter will rise at a more
modest clip of 2.7% annually through 2032. This projection assumes
a steady economic recovery with no major calamities like a large
rise in oil price, swings in macroeconomic policy or financial
meltdowns.
Further, major North American airlines such as
United Continental Holdings Inc.
(
UAL
),
Delta Air Lines
(
DAL
),
Southwest Airlines Co.
(
LUV
),
JetBlue Airways Corporation
(
JBLU
) and
US Airways Group Inc.
(
LCC
) would raise capacity (available seat miles) at an annual rate of
3.1% reaching 1.89 trillion by 2032.
Underlying Growth Factors
The 20-year airline growth is expected to stem from the
implementation of NextGen, the satellite-based navigation system
that aims to make air travel more efficient. Further, the carriers
are taking numerous steps to improve their profitability. Fare
hikes and fuel hedging are the most effective tools to counter the
negative impact from rising fuel prices. Hedging strategies provide
a cushion to fuel price volatility and are used extensively by the
majority of air carriers.
The companies' ability to pass along the increased costs of fuel
to their customers is nonetheless limited by the competitive nature
of the airline industry. However, the carriers have been successful
till now in passing along the higher prices to customers in the
form of fare hikes. Last month, Southwest, JetBlue, United, Delta,
American and US Airways have all raised ticket prices on many
flights by $10 per round trip. Last year, the airlines have
implemented about 10-12 fare hikes. The trend, it appears, will
continue throughout the decade albeit at a slower pace, as crude
oil price is projected to approach $140 per barrel by 2032,
according to the FAA.
Additionally, the growing demand for air travel and a relatively
lesser number of planes will make future fare hikes possible over
the next two decades. Besides, airline mergers and consolidation
will bring down the number of flights and reduce the number of
cities served.
Our Take
To sum up, increasing demand for global air travel and a
concomitant rise in fares justify our optimistic thesis on the
airline industry as a whole. Further, air carriers are cutting
capacities and adding novel features to their services, as well as
introducing new products. These measures will fuel revenue growth
and reduce non-fuel costs thereby driving future profitability.
Moreover, the carriers are focusing on fleet rightsizing. Though
initially expensive, this seems to be the correct strategy to lower
non-fuel costs. Air carriers are replacing their older fleet, which
are no longer practical in a fuel-expensive environment, with the
latest fuel-efficient aircrafts.
We maintain our long-term Neutral recommendation on Delta,
United Continental, Southwest and JetBlue. For the short term (1-3
months), JetBlue retains a Zacks # 2 (Buy) Rank while the rest hold
the Zacks # 3 (Hold) Rank.
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
JETBLUE AIRWAYS (
JBLU
): Free Stock Analysis Report
US AIRWAYS GRP (
LCC
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis
Report
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