4 Airline Stocks That Could Fly Higher in 2018

It seems that airline stocks are back in favor after being laid low by multiple headwinds like the recent hurricanes, the devastating earthquake in Mexico and issues related to customer dissatisfaction for the greater part of 2017.

Contrasting Price Performances Signal Improvement

Post hurricanes things are looking up for airline stocks. This is evident from the charts below which compare the price performance of the Zacks Airline industry with the S&P 500 Index in the first nine months and the last three months of 2017.

While the industry gained only 1.8%, the S&P 500 index rallied 12.6% in the first nine months of the current year.

The industry, however, handily outperformed the S&P 500 index in the last three months, rallying 12.9% compared with the S&P’s gain of 6.4%.

Improving Unit Revenue Scenario

Bullish unit revenue views from sector heavyweights for the final quarter of 2017 bear testimony to the improved scenario for airline stocks.

At its recently held Investor Day, Delta Air Lines DAL said that it expects passenger revenue per available seat miles (PRASM: a key measure of unit revenue) for the current quarter to improve by approximately 4% — the highest point of its previously guided range of 2% to 4%. Southwest Airlines anticipates operating revenues per ASM (RASM) to increase between 1% and 2%, which compares favorably with the previous outlook of up slightly to 1.5 %.

Furthermore, the rising fuel costs scenario might lead to rise in ticket prices and boost revenues. In fact, in the last three months oil prices have increased more than 43% and are currently hovering around the $60 a barrel mark. The International Air Transport Association (“IATA”) projects that jet fuel prices will escalate to around 12.5% to $73.8 per barrel in 2018.

We note that Delta expects to perform well backed by increased unit revenues in 2018, with PRASM growth estimated in each quarter. Higher fuel prices are likely to drive unit revenue growth in 2018.

Dividends/Buybacks Represent Solid Financial Health

Financial prosperity of the sector participants is reflected in the fact that the likes of Southwest, Delta and SkyWest SKYW have hiked their respective dividend payouts in 2017.

Additionally, these carriers have indulged in share buybacks that substantiates their solid financial health yet again. For example, United Continental Holdings UAL recently announced a new $3 billion share repurchase program. Also, JetBlue Airways’ JBLU board of directors approved a new share repurchase program, earlier this month.

On the back of such solid financial prospects, the trend of dividend hikes and buybacks is expected to continue in 2018 as well.

Notably, the robust financial health of most carriers has prompted them to invest substantially in improving flying experience for travellers, in a bid to stay afloat in the competitive airline space.

IATA: Airline Industry to See Higher Profits in 2018

IATA predicts global net profit of $38.4 billion for the industry in 2018. This is much higher than the profitability forecast of $34.5 billion for the current year. The bright projection can be attributed to the strong demand for air travel. The bulk of the global profits in 2018 is expected from the North American region ($16.4 billion). The estimated figure is higher than $15.6 billion expected in 2017.

Global net profit margin is expected to improve marginally to 4.7% in 2018 from 4.6% estimated in 2017. The top line is projected to come in at $824 billion next year compared with $754 billion projected in the current year.

Optimism surrounding the air cargo business has also improved. Cargo revenues are forecasted to increase to $59.2 billion for 2018 (estimated revenues for 2017 are $54.5 billion).

According to the forecast, air travel growth of 6% is expected in 2018. The estimated figure for 2018 is above the average growth of 5.5% in the last 10-20 years. Capacity is projected to rise by 5.7% in 2018. According to the forecast, load factor (percentage of seats filled by passengers) for the next year is expected to touch record levels of 81.4% as capacity expansion is likely to outweigh traffic growth.

New Tax Regime Likely to Aid Airlines

Last Friday, President Trump finally signed the much-anticipated tax bill into law. The $1.5 trillion tax overhaul package reduces corporate taxes from 35% to 21%. The significant reduction in corporate tax rate is likely to boost cash flow, which in turn will aid the bottom lines of carriers.

Since most airline companies are almost entirely exposed to the statutory corporate tax rate, the massive tax cut is expected to help them save a considerable amount in tax payment in the United States.

Moreover, airline companies seem to invest significantly for capital expenditures. In the new regime, these companies will be able to deduct their capital expenditures from taxable income immediately, which was not allowed earlier. As a result, their annual tax bills would be lowered significantly due to higher deductions. This, in turn, will leave more cash in the hands of these companies to fund their capital expenditures, acquisitions, share repurchases among others.

Improving Zacks Industry Rank Supports Favorable Scenario

The Zacks Industry rank of 76 carried by the 25-member Zacks Airline Industry also highlights the fact that airline stocks are back in favor. Notably, a favorable rank places the industry in the top 30% of the 250+ groups enlisted. The bullish stance on the industry is further augmented by the fact there have been 12 positive estimate revisions in the fourth quarter of 2017.

Also, the Zacks Industry Rank has improved immensely, given the industry’s 200+ rank only a few months ago.

We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.

Click here to know more: About Zacks Industry Rank

Valuation Signals More Upside

Going by the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio, which is often used to value airline stocks, given their significant debt levels and high depreciation and amortization expenses, the industry doesn’t look expensive at this point.

The industry currently has a trailing 12-month EV/EBITDA ratio of 6.6, which compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 11.9. The industry’s favorable positioning compared with the overall market certainly signals more upside.

Airlines Should Grace Your Portfolio

Apart from the above-mentioned factors, an improving economy, a much-improved job market and rising disposable income are also favorable for sector participants. Furthermore, consumer confidence remains strong resulting in more Americans going on vacations. Consequently, we expect airline stocks to fly high in 2018.

Given this bullish backdrop, we believe it’s worth investing in the airline space this year. However, with a wide range of airline firms thronging the investment space, it is by no means an easy task for investors to arrive at winning stocks. This is where the Zacks Rank, which justifies a company's strong fundamentals, can come in really handy.

Markedly, the Zacks Rank is a reliable tool that helps investors to trade with confidence regardless of their trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education .

Our Choices

Based on favorable Zacks Ranks, we have zeroed in on four airline stocks. Each carrier has a market capitalization in excess of $1 billion.

Gol Linhas Aereas Inteligentes S.A. GOL is a low-cost and low-fare carrier, headquartered in Sao Paulo, Brazil. The company has a market capitalization of $1.4 billion and sports a Zacks Rank #1 (Strong Buy). Also, the stock has a VGM score of A.

GOL Linhas has seen the Zacks Consensus Estimate for 2018 earnings being revised 23.3% upward over the last 30 days. An increased demand for air travel on the back of an improving Brazilian economy should drive the company’s growth next year.

So far this year, GOL Linhas has returned more than 100%. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

The company has returned more than 100% so far this year.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SkyWest is the holding company for two scheduled passenger airline operations and an aircraft leasing company. The stock carries a Zack Rank #2 (Buy) and has a market capitalization of $2.7 billion. It also exhibits a VGM score of B.

Over the last 60 days, the company has seen the Zacks Consensus Estimate for 2018 earnings being revised 1.8% upward and has returned 47% on a year-to-date basis.

LATAM Airlines Group S.A. LTM is a provider of passenger and cargo air transportation services in South America, North/Central America, Europe, Africa, Asia, and Oceania. This Zacks Rank #1 carrier is based in Santiago, Chile and has a market capitalization of $7.7 billion.

The stock has seen the Zacks Consensus Estimate for 2018 earnings being revised 8.9% upward over the last 60 days and has returned 70.3% on a year-to-date basis.

Our final pick is Azul SA AZUL, the largest airline in Brazil based on the number of cities and departures with 755 daily flights to 104 destinations.

Azul, which went public this year, is a Zacks Rank #2 stock and has a market capitalization of $7.5 billion. The company’s shares are up 8.5% year to date.

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JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report

Gol Linhas Aereas Inteligentes S.A. (GOL) : Free Stock Analysis Report

Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report

United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report

SkyWest, Inc. (SKYW) : Free Stock Analysis Report

LATAM Airlines Group S.A. (LTM) : Free Stock Analysis Report

AZUL SA (AZUL) : Free Stock Analysis Report

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