Are Airlines Entering Their “Seasonally Strong Stock Period”? Bank of America Says Yes

March 6, 2017

In a new report*, Bank of America (BofA) Merrill Lynch says that airlines are entering what it calls their “seasonally strong period” from a historical perspective. Going back to 2000, the Bloomberg Airline Index has outperformed the S&P 500 Index 87 percent of the time in October, the strongest month for the group.

BofA Merrill Lynch adds that the fourth quarter is historically “the best quarter of the year, outpacing the [S&P 500] 67 percent of the time.”

As for the most recent third quarter, ending September 30, 2015, low fuel prices continued to help propel commercial airlines’ stock performance, with a majority of them beating the S&P 500. Deutsche Bank estimates that once all airlines have reported, they will have collectively posted a total pretax profit of $7.3 billion, up from $5 billion a year earlier.

This comes after airlines raked in a stunning after-tax net income of $5.5 billion in the second quarter, its most profitable three-month period since 2007.

Of the four legacy airlines—which includes American Airlines, United Continental and Southwest AirlinesDelta Air Lines has been the best-performing over the past several years. The Atlanta-based carrier currently has an Outperform rating from Credit Suisse, a Swiss multinational financial services company, which writes that if the company can improve its passenger revenue per available seat mile (PRASM) in the fourth quarter, “investors will be satisfied.”

Delta, the first major airline to report on fourth-quarter earnings, posted a profit of $1.32 billion, up from $357 million a year ago.

Domestic low-cost carriers (LCCs) such as SkyWest, JetBlue and Allegiant have lately been drawing much attention from analysts and investors. SkyWest, for instance, has been trading at relatively high volumes on news that it managed to increase its operating cash flow over 100 percent to $133.60 million compared to last year’s third quarter. The carrier hit a new 52-week high in intraday trading on Monday, October 12.

A similar story applies in Europe, where LCCs such as easyJet, Ryanair and Wizz Air have all raised their profit forecasts for the year. Hungarian Wizz Air, which opened nine new routes over the last 12 months, saw the number of its passengers between September 2014 and 2015 expand 22 percent.

Aircraft manufacturer Boeing is also turning heads. The Chicago-based company reported record deliveries in the third quarter, up to almost 200 from 186 a year ago. With a backlog of close to 5,700 commercial airplane orders, Boeing announced that third-quarter revenue jumped 9 percent to $25.8 billion.

In a much-anticipated move, many airlines are beginning to pass fuel cost savings on to customers. Airfare analyst group Hopper reports that in September, ticket prices were a “whopping” 18 percent lower than the same time last year, when fuel was nearly twice as expensive.

This is all part of the industry’s recent push to make air travel more attractive and to gain back many customers’ loyalty. Other measures include offering the option of additional legroom, lounge access and other perks when flights are booked on airlines’ websites instead of on low-price comparison sites, as well as the installation of 50-percent larger overhead bins, in the case of Alaska Airlines.

U.S. Global Jets ETF (JETS)

For the last year, airline earnings have managed to beat Wall Street’s expectations. Low fuel costs continued to drive up profits, for legacy as well as low-cost carriers, both here and abroad. And according to analysts, we’re entering what has historically been airlines’ “seasonally strong stock period.”

Now might be a good time to look at the U.S. Global Jets ETF (JETS), the only exchange-traded fund on the market today that provides investors exclusive, global access to this growing industry.