Perhaps few industries are as schizophrenic as airline stocks. On surface level, air travel should be one of the biggest beneficiaries of an otherwise devastating collapse in crude oil and key energy resources. Ever since jet fuel surged starting in 2004, it represented the single most onerous cost among airline stocks.
However, a precipitous decline in crude oil that sparked in the summer of 2014 has breathed new life into the broad transportation industry. And with sanctions now being lifted off Iran, this potentially introduces a pipeline for even more oil — great news for previously embattled airline stocks.
Except, that is, for one nagging fact — in the financial markets, most airliners suffered a sharp drop in sentiment in the final quarter of 2015. Worryingly, the bearishness in airline stocks has continued into the new year despite both Brent Crude Oil and West Texas Intermediate dropping below $30 per barrel. Even with multiple companies dropping fuel surcharges that were once a necessity to stay afloat, it appears that the markets have largely dismissed such efforts.
What’s with this trend? First, the much-touted jobs recovery is hardly a slam dunk, as wage growth remains a particularly thorny issue. On top of that, preliminary data from the University of Michigan’s Index of Consumer Sentiment shows that, year-over-year, January’s numbers are forecast to underperform by 5%. So, while consumer sentiment has improved dramatically from its 2008 lows, there’s still much work to be done — and that means potentially less revenue for airline stocks.
The bottom line here is that lower energy costs are just one piece of a very complicated puzzle. Here are three airline stocks that should beat upcoming earnings expectations but may still fall short in the markets.
Airline Stocks: United Continental Holdings Inc.
The largest company in terms of total assets among the airline stocks mentioned on this list, United Continental Holdings (UAL) will be eager to get their equity shares back in tip-top shape.
UAL may have the most toys, but it’s not the leader in terms of market capitalization. That may come as a surprise until you realize that 2015 was a forgettable one for UAL, which lost nearly -14%. But management has to act quickly, as UAL in this year is already down 25%.
As if any of the airline stocks needed more pressure, expectations are sky-high for UAL when it releases fourth quarter of fiscal year 2015 results this Thursday. Wall Street consensus pegs the airliner’s earnings at $2.60 per share, a 113% year-over-year increase. Where the math gets a little fuzzy is in the revenue forecast, with consensus standing at $9.1 billion. This is roughly $200 million shy of the year-ago forecast, indicating that most of the EPS growth will be attributed to improved profitability margins.
Ordinarily, this isn’t a bad thing. Generally speaking, margins have trended positively over the past few years, and UAL should at least come within striking distance of its lofty EPS estimates. But from an investor’s point-of-view, growing by cutting has a very limited lifespan. At some point, the markets will want to see that UAL can deliver as much on the top line as it can on the bottom line.
Given the tenuous nature of both the domestic and global economy, UAL will have a hard time convincing buyers, even if it posts a decent earnings report.
Airline Stocks: Alaska Air Group, Inc.
The relative minnow of the airline stocks, with a market cap just shy of $9 billion, Alaska Air Group (ALK) packs a considerable punch in the markets. Last year, ALK stock jumped 35%, easily surpassing many of its competitors. Unlike other airline stocks which showed signs of tiredness late in 2015, ALK found its stride in the second-half and never looked back. However, it couldn’t avoid the broad devastation of the current month, with ALK absorbing a year-to-date loss of 19%.
Which side of the ALK story will show up for 2016?
Earnings expectations certainly haven’t waned in conjunction with the airliner’s recent setback in the markets. For its Q4 FY2015 report — expected on Jan. 21 — ALK has an EPS consensus target of $1.41 in its sights, which is 52% higher than its year-ago estimate. Both ALK’s operating and net margins have been improving strongly since the end of 2011, which should make the lofty earnings goal achievable.
However, as with UAL, revenue growth for ALK is far less impressive. According to analysts’ expectations, the company is expected to pull in $5.6 billion for FY2015 — a modest 4.3% increase over FY2014 results. It would also nearly match the growth rate from FY2014 against FY2013. Though better than nothing, it pales in comparison to ALK’s average sales surge of 10% between FY2011 and FY2013.
This ho-hum revenue trend is likely the reason why many ALK investors cashed out when they did — and they may not cash in again until ALK stock shows a substantive improvement.
Airline Stocks: Southwest Airlines Co.
Famous in popular culture for its “Wanna Get Away?” slogan, Southwest Airlines (LUV) was also one of the lucky airline stocks to post positive returns for 2015 — barely. With a gain of slightly more than 2%, though, it’s hardly a cause for celebration.
Unfortunately for LUV investors, shares began to tumble in the tail end of last year — in December alone, the discount airliner lost more than 8%. Can LUV stock impress enough in this Thursday’s Q4 earnings report to boost its standing in the markets?
Much like other airline stocks, Wall Street has high hopes for the final quarter of 2015, anticipating an EPS target of 90 cents, or 31 cents higher than its year-ago results. All indications suggest that the ambitious target is very much attainable, given that LUV has one of the higher profitability margins within the industry. Revenue growth, though modest, is still better than either UAL or ALK. Analysts expect full-year sales to hit just a little below $20 billion, good for a 5.3% improvement over 2014 results.
Regardless of this favorable statistic, LUV demonstrates the bane of most all airline stocks: earnings growth that stems from fat-cutting. In addition, LUV’s role as a discount leader makes it a prime target for competition. Typically, it’s easier to duke it out on cost rather than product differentiation. Given the enormous losses suffered in the markets by discount airliners, there is a desperation that threatens to put LUV in a nasty price war.
Such a scenario makes potential investors for LUV stock understandably uneasy. It’s probably best to wait things out until the sky clears.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
