Strengths
- Ryanair transported 5.3 million passengers in June with a load factor of 72%. Load factor is the ratio of the aerodynamic force on an aircraft to the gross weight of the aircraft. Credit Suisse expects the company to operate near 80% of capacity in July through September, which is positive news as the travel recovery continues. The firm estimates that there are 100 million pounds ($139,284,400.00 USD) of weekly cash inflows.
- Earnings were reported better than guidance this quarter. American Airlines pre-announced its second quarter results better than consensus due to costs being 2-5% below the previous quarter’s guidance. Revenues were slightly higher than consensus due to higher traffic volumes. Delta Air Lines also reported better-than-expected earnings due to strong revenues. The third quarter is expected to be profitable, according to the company which indicated that leisure demand is back to pre-pandemic levels while corporate demand is at 40% of pre-pandemic levels. Alaska Airlines published an investor update guiding to higher-than-expected operating cash flow, an improved cost outlook, and revenue at the better end of its prior guidance range. Notably, the company produced a pretax profit during the month of June, the first profitable month since February 2020.
- JetBlue Airways announced a multi-year extension of its co-branded credit card agreements with both Barclays and Mastercard, a partnership that is expected to expand the airline’s consumer and small business credit card portfolios. In the U.S., Barclays has been the exclusive issuer and Mastercard has been the exclusive network of the airline’s co-branded credit card program since 2016. Analysts believe this is a meaningful development as the airline is renewing the deal with much better economics.
Weaknesses
- In June, airline equities have historically underperformed the market 70% of the time. In June 2021, airline stocks declined 12%, as positive earnings revisions remained muted and concerns around COVID-19 variants increased.
- Airline growth is improving, but not at the rate that the consensus is expecting. U.S. to European planned capacity growth for the second quarter is down 74% versus the second quarter of 2019 (and down 77% in the first quarter of 2021). Early looks at the third quarter indicate a 52% year-to-year decline, down 380 basis points.
- The Financial Times reports that the European Commission will announce the planned introduction of a tax on jet fuel to help the European Union (EU) meet its ambition of reducing average carbon emissions by 55% by 2030. Jet fuel is not currently taxed in the EU per Article 14 of the 2003 Energy Taxation Directive. The move would reportedly require unanimous backing from the 27-member states.
Opportunities
- Southwest Airlines is bullish on its future. The company has been able to return its fleet to the skies at a much more efficient rate than its competitors, according to company reports. Southwest also feels it has made great progress in adding fleet selectively, as traffic recovers in various city pairs. The airline did not furlough employees, so they can return to work easier. Lastly, Southwest is fully hedged to higher fuel prices.
- United Airlines ordered 270 Boeing and Airbus narrow body aircrafts, driving capital commitments to $35.9 billion as of May 31 of this year versus $24.3 billion as of December 31 of 2020. Capacity growth is expected to be 4% to 6% until 2026. This will allow the airline to accommodate higher traffic and grow. Also, the airline needs to modernize its fleet, as 431 of its aircrafts are 21 years of age or older.
- A corporate travel rebound signals the first signs of recovery in the industry. According to the Financial Times, hotels, airlines, and travel companies reported a rise in bookings in the second quarter as executives return to the road. Globally, 41% of business travelers expect their next trip in 2022 or beyond, up from 30% in Bank of America’s last survey. Similarly for international, 51% said they would not take a long-haul fight until 2022 versus 39% that said they would take a long-haul flight now.
Threats
- Stifel’s proprietary demand model predicts the risk of a demand slowdown for airlines. Demand sentiment has declined to levels just above the 0 standard deviation mark. This could be the result of concerns over the delta plus variant of COVID-19. Despite this, Stifel continues to see TSA throughput strengthening. COVID does remain a risk to air travel trends, particularly for the upcoming fall season.
- With the delta variant of the coronavirus sweeping through many regions in the world the past few weeks, parts of Asia, Australia and Europe are re-introducing travel restrictions. The Sydney metro area recently went back into lockdown for the first time in a year, while Germany reinstated a 14-day quarantine for travelers arriving from delta variant areas.
- Bank of America expects it will be challenging for airlines to pass on higher costs this year given the early stages of the travel recovery and excess capacity, which has resulted in the bank’s lowering of forecasts. European airlines have reduced hedging levels to 50-90% of their 12-month jet-fuel consumption. Soaring carbon prices and more-stringent EU regulation for aviation carbon emissions are likely to result in significantly higher carbon costs for European airlines. The bank estimates that the EU carbon costs will more than double from 2019 to 2022 for European airlines on average, representing 2.5% of revenues in 2022.
Curious about investing in airline stocks after a solid second quarter? Explore the U.S. Global Jets ETF (JETS) – an airline-focused ETF that gives investors exposure to a basket of 51 holdings.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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Disclosures: Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds. The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index. Airline Companies may be adversely affected by a downturn in economic conditions that can result in decreased demand for air travel and may also be significantly affected by changes in fuel prices, labor relations and insurance costs. Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political, or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
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Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business.