Airlines can lose altitude
While not all are created equal and some are still better than others, the industry as a whole can slow.
By Neal Rau, Stock Traders Daily
The airline sector in transportation has done very well in this recovery. All airlines had to do was lower capacity, increase airfares, merge with rivals, and charge customers add-on fees for everything under the sun. The airline industry now has more add-on fees than pretzels in the bag they give some lucky passengers.
This will be at least the third consecutive year of record revenues for every major airline and the fourth consecutive year of profits for the industry. With so many mergers, the top four airlines account for more than 80% of passenger revenues by volume now.
Record earnings have been driving airline stocks higher. US Airways Group (LCC) reported second quarter results on July 24, posting record total revenue of $3.9 billion, up 2.9% versus the second quarter 2012. Second quarter pretax profit excluding net special items was a record $409 million -- the highest for any quarter in the company's history.
The company's gamble to not hedge fuel costs has paid off. US Air enjoyed the lowest fuel price per gallon in the industry in eight of the past 12 quarters. LCC stock has run up about 12% in the last month and over 80% in the last year. LCC expects its merger with American Airlines to close in the third quarter.
However, not all airlines have impressed the Street lately. Leading passenger airline, JetBlue Airways (JBLU) delivered weak second-quarter 2013 results due to sluggish economic scenario. High aircraft maintenance expenses, steeper landing fees and rents further added to the woes.
Southwest Airlines (LUV) actually posted a drop of nearly 2% in its profits from a year ago, down to $224 million, or $0.31 earnings per share. Its revenue was up only 0.6% to $4.6 billion. While Southwest remains better hedged against wild fuel price changes versus some peers, its revenue per seat mile was down by 2.2%.
Oil prices remain a headwind for the industry. Oil has spiked above $100 per barrel again, and if it remains elevated or go higher, airlines could start to feel pressure on their bottom lines.
Over the past three years, airlines have consistently been able to raise fares in line with costs. If future economic weakness prevents them from raising prices to offset higher fuel costs, airlines could see a big drop-off in stock performance. Stock Traders Daily shows United Continental Holdings (UAL) and Delta Air Lines (DAL) as "neutral" near term, but that can change based on oil prices.
Recently, United attempted to raise domestic fares by $10 per round-trip. It was the eighth time in 2013 that an airline attempted to raise fares. United ended up rolling back the fare increase after other carriers, particularly LUV, did not match it. Only two fare hikes have taken hold of the eight attempts so far this year.
Not all airlines are created equal, and sometimes the ones with recent disappointments may be the best buys. For example, Stock Traders Daily offers a real time trading report for Southwest Airlines that shows LUV has recently tested longer-term support, and thus far support is holding. If that stays true, the stock looks like it could head towards longer-term resistance. That puts LUV in play, but does not reflect on other stocks in the sector.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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