The two main ingredients for airline profits are a growing economy and low fuel prices. The first part is true because the healthier the economy, the more business and leisure travel takes place, thus driving up the demand for airline tickets. The second part becomes much more obvious when you realize that 20%-30% of the operating cost of an airline goes to fuel. So the drop from $100 per barrel oil to the present has caused a lot more money to flow to the airlines’ bottom line.
The combination of these two catalysts had airlines outperforming the pack in 2015. However, in 2016 they stumbled out of the gate much more than the S&P 500 even with oil prices tumbling. That is because of the increased concern that the economy may be ready to roll over, which put earnings prospects into doubt.
Plain and simple, if you think a recession is coming, then you avoid airline stocks as you will be avoiding every economically sensitive stock. However, if you think that the economy will keep growing, and oil prices stay low, then few opportunities are more attractive than the airlines. Not only are their earnings estimates soaring, but they are also tremendous values with P/Es typically under 10.
Now let’s take flight with the three most attractive airline stocks (see “HIgh flyers”):
Delta (DAL): Delta is considered one of the best-run airlines and rarely has operational stumbles. This was quite apparent in their most recent earnings announcement which led to an 8% increase in earnings projected for the current year. On top of that is a slate of strong style scores (Value A, Growth B, Momentum A), which increases the odds the stock will outperform in the future.
Hawaiian Holdings (HA): This niche carrier has been impressing investors with consistent earnings beats. In fact, they have only one miss in the last nine quarters. After the most recent earnings announcement, estimates have come up 12.5% which is why it sports a Zacks Rank of one (Strong Buy). Just like Delta it also has strong style scores which add to its attractiveness (Value A, Growth A, Momentum A).
Southwest (LUV): Most people hate airline stocks, but if they were to choose one it would be Southwest. That is because they have high customer satisfaction ratings because they often do things better than most other airlines. That has led to a loyal customer base helping them have only one earnings miss in over four years. There is a lot to LUV in that track record.
Few industries offer more upside than the airlines at this time. So consider adding one or more to your portfolio before their share prices take flight.
Note: The author of this article personally owned shares of DAL at the time the article was written.