Zacks Industry Outlook Highlights: United Continental Holdings, Spirit Airlines, Southwest Airlines, American Airlines Group and Alaska Air Group

For Immediate Release

Chicago, IL – October 9, 2017 – Today, Zacks Equity Research discusses the Industry: Airlines, Part 3, including United Continental Holdings (NYSE:UAL – Free Report), Spirit Airlines (Nasdaq:SAVE – Free Report), Southwest Airlines (NYSE:LUV – Free Report), American Airlines Group (Nasdaq:AAL – Free Report) and Alaska Air Group (NYSE:ALK – Free Report).

Industry: Airlines, Part 3

Link: https://www.zacks.com/commentary/131256/will-the-ride-get-bumpier-for-airline-stocks

It is a well-documented fact that stocks in the airline space have been plagued by multiple headwinds like weather-related disruptions, pricing issues and high costs. The turbulence in the sector is largely responsible for the NYSE ARCA Airline Index declining 2.5% over the last three months. With Q3 earnings season coming up, the ongoing turbulence may result in airlines performing disappointingly. Let’s delve into the details.

Harvey, Irma Ground Airlines - Q3 Unit Revenue Views Cut

Harvey, which wreaked havoc on America’s fourth-largest city, Houston, with heavy rainfall, has negatively impacted airline operations and caused multiple flight cancellations. In fact, air travel was hurt with two Houston airports, George Bush Intercontinental Airport (IAH) and William P. Hobby Airport (HOU), reportedly remaining closed for a few days (since the noon of Aug 27) due to Harvey-induced heavy rainfall. The airports are operational now.

United Continental Holdings (NYSE:UAL – Free Report), the parent company of United Airlines, was the worst hit, as Houston is the carrier’s second-largest hub. In September 2017, company trimmed its views with respect to pre-tax margin and passenger revenue per available seat mile (PRASM: a key measure of unit revenue) for the third quarter mainly due to Harvey. The carrier now expects PRASM to decline between 3% and 5% year over year (the earlier guidance provided in July was +1% to - 1%).

In fact, Harvey has impacted the third-quarter PRASM to the tune of approximately 150 basis points. The carrier now expects pre-tax margin between 8% and 10% (previous guidance was 12.5% and 14.5%).

Spirit Airlines (Nasdaq:SAVE – Free Report), which also has significant exposure to Houston, expects its top line to shrink to the tune of approximately $8.5 million in the third quarter due to the natural calamity. Currently, Spirit Airlines anticipates total revenue per available seat mile (TRASM) to decline between 7% and 8.5% (the previous guidance was 2% and 4%). In fact, per the company, 100 basis points of the trimmed guidance can be attributed to the negative impact of Harvey. Also, aggressive competitive pricing in its key markets contributed to the bleak forecast.

Southwest Airlines (NYSE:LUV – Free Report), which had to call off approximately 2,800 flights due to Harvey, now expects operating revenue per available seat mile (RASM) for the third quarter in the range of down 1% to slightly up, on a year-over-year basis. The metric was earlier projected to increase approximately 1% from the year-ago quarter.

Close on the heels of Harvey, came another natural calamity, Irma, which also hurt airline operations. American Airlines Group (Nasdaq:AAL – Free Report), which has significant exposure to Florida including its hub at Miami International Airport, had to cancel multiple flights due to Irma. The natural calamity also caused it to trim its third-quarter TRASM view.

High Costs Likely to Hurt Q3

With labor deals in vogue in the aviation space, labor costs have escalated, thereby hurting the bottom lines in the last few quarters. The picture is likely to be no different in the third quarter.  For example, labor costs shot up significantly at Alaska Air Group (NYSE:ALK – Free Report) following the amendment to the pay-related pilots’ contract at its subsidiary, Horizon Air.

Following the agreement, the company expects third-quarter cost per available seat mile (excluding fuel and other special items) between 8 cents and 8.05 cents. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, increasing fuel costs do not bode well for airlines. Oil prices are currently hovering around the $50-a-barrel mark, way higher than the lows of around $26 a barrel touched in February last year. The rise in fuel costs, which again may be Harvey induced, are also likely to distort the Q3 earnings picture for airlines.

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Southwest Airlines Company (LUV) : Free Stock Analysis Report
 
United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
 
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
 
American Airlines Group, Inc. (AAL) : Free Stock Analysis Report
 
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
 
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