Sector Picks: Airline Companies Performing Well

Reviewed: February 09, 2015
By FinanceWeb

Airline stocks outperformed the S&P 500 in 2014 by a substantial margin. The industry had many leading stocks that returned nearly 100 percent in the preceding year. Among the factors that have contributed to the growth in revenues and stock performance are low oil prices. The price of fuel is a major expense for airline operations, and it factors into the price of each ticket sold. The global slide of fuel prices corresponds directly with the applicable crude oil price. Airlines buy fuel, store fuels, and purchase futures all in efforts to hedge the price impact of fuels on their operations. Passengers have been relieved of the worst of the fuel surcharges that affected the price of travel for most of the past decade.

Four Stocks to Watch

United Continental has profitable Asian routes that benefit from routes, expertise, and low fuel prices. Similarly, JetBlue has some coveted domestic U.S. routes. US American Airlines Group has a added to its scope by its merger with American Airlines. Delta has managed to trim some labor while maintaining good relations. Mergers and acquisitions have reduced competition and strengthened operations for United and US Air. Pricing competition can benefit consumers but also reduce operating margins for operators. Operating margins were long a weakness in the industry have risen; UAL has doubled its margins and Delta’s increased by 50 percent. Airline stocks have maintained moderate prices given their recent high levels of performance. Many leading performers sell within reasonable ranges of the estimated returns. Investors can assess stock prices in a number of ways. One method is to compare the stock price with the earning per share and determine the multiple of the stock price that equals earnings. These four stocks trade in the multiples range of 6.4 to 13.5 and these P/E ratios suggest a favorable price.

Prospects for 2015

Airlines typically experience lower revenues and business volumes in the first quarter of the year. The crude oil price benchmarks have risen recently but remain low by the prior year standards; airlines are poised to continue the success they enjoyed in 2014. The improving U.S. economy is a key factor. China and India are also on a track for some positive growth. Europe still has difficulties in Greece and a debate over austerity. However, their potential to emerge and stimulate growth is immense. Low fuel prices and increased consumer spending are excellent signs for airline industry growth and an optimal time for travel. Moving into high travel seasons, the prospects for 2015 are excellent.

Volatility in Crude Oil Prices

The crude oil price benchmarks are volatile and respond to news and events concerning production, supply, disruptions, and overall regional and global demand. Sharp increases and decreases in a benchmark crude oil price can translate directly into movement of leading airline stocks. Overall, analysts assess market factors favoring continued revenue growth for the airline sector as more positive than negative. Market growth in the U.S. markets and Asia appear particularly strong.

Investor Considerations

Airlines play an important commercial role, and it promises to expand as global economics brings geographical distance to less of a factor for doing business. Airline travel is vulnerable to economic trends and world events, and this is something for the investor to consider. Economic growth is gaining momentum in the United States, but there are political divisions that can become a factor in the growth projections. There is a similar situation in Western Europe, and a consensus favoring growth policies has not yet taken hold. Fuel prices are low but may not remain that way indefinitely; political events can affect travel in unforeseen ways.