Is All Well with Airline Stocks Despite Oil Weakness?

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The fourth quarter 2015 earnings season is all but over for stocks in the airline space. The picture that has emerged post the final earnings season of the year is not drastically different from the preceding quarters.

Airline stocks have stumbled on the revenue front yet again, hurt primarily by the strong dollar, as has been the case over the past few quarters. Even though this was more or less expected, what's more alarming is that many leading carriers have missed our estimates even for earnings.

Q4 Earnings Misses Despite Cheap Oil

The final quarter of 2015 saw airline heavyweights like Delta Air Lines DAL and United Continental Holdings UAL failing to beat the Zacks Consensus Estimate on the bottom-line front despite oil prices being low. Cheap fuel costs have, however, resulted in significant year-over-year bottom-line expansion for carriers in the fourth quarter of 2015.

One possible reason for this unexpected bottom-line miss is that the oil price weakness has been in place for quite some time now - since mid-2014. The extended period of the slump in oil prices means that analysts must have already accounted for this major tailwind for carriers while setting their earnings estimates. Cheap oil is already priced in.

Moreover, plunging oil prices mean that fuel costs are no longer the largest input cost for carriers. Fourth-quarter results of carriers like Delta, United Continental, Southwest Airlines LUV and Alaska Air Group ALK substantiate this view with aircraft fuel expenses ranking second behind salaries, wages and related costs. The rise in labor costs has not helped the bottom line and it has now comfortably displaced fuel costs as airlines' largest expense.

Oil Price Weakness Hits PRASM Also

The continuous drop in oil prices has hurt carriers' top lines as well. For example, United Continental has already stated that the slackening of demand from energy companies at the carrier's Houston hub is due to top soft oil prices resulting in constantly declining passenger unit revenue (PRASM: a measure of unit revenue).

In fact, PRASM-related worries have impacted carriers for quite some time now. Lower fuel surcharges on international flights due to weak oil prices have been one of the reasons behind the constant decline in this key revenue metric, which is a measure of sales relative to capacity for a carrier.

Reservations related to PRASM are likely to persist further in the near term, hurting airline prospects. For example, United Continental expects PRASM to decline in the range of 6% to 8% in the first quarter of 2016. Likewise, American Airlines Group AAL has projected a 6% to 8% drop in PRASM for the first quarter of 2016.

Zika Fears: The Latest Challenge on the Block

As if pricing, PRASM and capacity related troubles were not enough, the current outbreak of the mosquito-borne Zika virus in multiple countries, particularly in South and Central America, has set off further alarm bells. The spread of the disease has caused many carriers to offer fliers (particularly pregnant women) refunds or options to reschedule their travel to Zika-affected areas at a later date.

With Zika highly prevalent in countries like Brazil, already struggling carriers like Brazil-based GOL Linhas GOL could be in for tough times, particularly given that the summer Olympics is scheduled to be held in the country this year. Long Island City, NY-based JetBlue Airways Corp. JBLU , which has significant presence in Mexico where Zika fears are on the rise, has lost over 9% so far this month due to concerns related to the virus.

To Wrap Up

The above write-up clearly suggests that declining oil prices are no longer an out-and-out savior for airline stocks. Declining oil prices, while resulting in year-over-year bottom line expansion, have accounted for PRASM woes. The Paris attacks and the outbreak of the Zika virus have posed further challenges for carriers.

The above-mentioned headwinds have contributed to the NYSE ARCA Airline index shedding over 24% of its value over the past year, despite oil prices being low in the period. Evidently, weak oil prices, apart from their obvious benefits, have brought some brickbats as well for airline stocks.

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SOUTHWEST AIR (LUV): Free Stock Analysis Report

JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report

GOL LINHAS-ADR (GOL): Free Stock Analysis Report

DELTA AIR LINES (DAL): Free Stock Analysis Report

ALASKA AIR GRP (ALK): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

AMER AIRLINES (AAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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