SELL US AIRLINE STOCKS?
US airline stocks could be in trouble
This article first appeared in Yahoo Finance on 23 Sep 2017. As usual, BBTE Club comments are in red text.
Stocks in the airline space have been going through tough times of late.
Major airline companies are severely hurt from the consecutive impacts of Harvey and Irma.
Consequently airline stocks have lowered their guidance for the upcoming quarter.
The airline companies are expected to reveal third-quarter 2017 earnings numbers next month.
With the tropical storms bearing heavily on the airline companies, the scenario for future looks very grim.
Bleak Third-Quarter Forecasts
Several airline companies have trimmed their third-quarter outlook, primarily due to natural disasters.
United Continental Holdings UAL, the parent company of United Airlines, the worst hit from Harvey has reduced views with respect to pre-tax margin and passenger revenue per available seat mile (PRASM: a key measure of unit revenue) for the current quarter.
The carrier now expects PRASM to decline between 3% and 5% year over year (the earlier guidance provided in July had called for the metric to be in the range of +1% to -1%).
The carrier currently expects pre-tax margin between 8% and 10% (previous outlook had called for the metric to be in the range of 12.5-14.5%).
Higher fuel prices are also estimated to hamper the bottom line in the third quarter.
Fuel price per gallon is now projected in the band of $1.72-$1.77 (earlier view: $1.56-$1.61).
Cost per available seat miles, excluding fuel, profit-sharing, third-party business expenses and other special items are now projected to increase between 2.5% and 3.5% (earlier outlook had called for a rise in the 2-3% range).
The Chicago-based company now expects capacity to grow between 3% and 3.5% compared with the approximate 4% expansion projected earlier.
Spirit Airlines SAVE with significant exposure to Houston expects the top line to shrink to the tune of approximately $8.5 million in the third quarter due to natural calamity.
Currently, Spirit Airlines anticipates total revenue per available seat mile (TRASM: a key measure of unit revenue) in the current quarter to fall between 7% and 8.5% (the earlier guidance had called for a drop in the band of 2-4%).
Aggressive competitive pricing in key markets also contributed to this bleak forecast.
Delta Air Lines DAL also trimmed outlook for the third quarter due to stiffer competition and higher fuel costs.
The carrier now estimates passenger unit revenue for the said quarter to improve in the range of 2-3%.
Past view had called for growth in the 2.5-4.5% band.
The airline also raised outlook for fuel prices to $1.68-$1.73 from the earlier $1.55-$1.60 bracket on the back of upsurge in market price, which began in late July.
Apart from the above carriers, the likes of JetBlue Airways Corp. JBLU and Southwest Airlines Co. LUV also cut their respective unit revenue views for the third quarter.
American Airlines Group AAL expects TRASM to grow at a slower pace in the third quarter due to difficult year-over-year comparisons.
High Labor Costs
Steep labor costs have been hitting the airline stocks for quite some time now.
In fact, the future scenario also seems dull and the metric is expected to affect the third-quarter results as well.
The Zacks Industry Rank of 202 (out of 250 plus groups) carried by the Zacks Airline industry further highlights the plight of the airlines.
This unfavorable rank places the companies in the bottom 21% of the Zacks industries.
BBTE Club Comments:
Traders can easily check the trend and momentum of airline stocks under our TS and MP sheets outlook for the US market.
Technical analysis can detect movement in stocks ahead of their fundamental announcement and is particularly useful in timing entry and exit levels.
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