3 Airline Stocks to Bet on Before Labor Day Weekend

The U.S. aviation industry is poised to end the summer on a high note as more good news is on the anvil. An anticipated rise in air traffic during the Labor Day weekend coupled with fall in crude oil prices should boost the profit outlook of airline companies.

Airline stocks have already gained a positive momentum due to encouraging financial performance in the first half of 2014. Let’s see what may help drive their performance going forward.

Labor Day Holiday Travelers to Rise

The airline industry is expected to see about 14 million passengers over the Labor Day holiday period. Industry’s leading trade group Airlines for America (‘A4A’) confirmed that that the number is up 2% from an estimated 13.8 million in 2013. The group added that airlines are increasing the number of seats to match the increased demand.

Separately, auto club AAA forecasted that 34.7 million Americans will travel a minimum of 50 miles from home via car or plane over the five-day period ending on Labor Day. That would be a 1.3% year-over-year increase. It will also be the highest volume for the holiday since recession.

However, if compared to other major holidays such as Independence Day and Memorial Day, the number is low. According to AAA, about 41 million people were expected to travel a minimum of 50 miles via car or plane over the 2014 Independence Day weekend. Similarly, 36 million people were forecasted to take to the roads and skies during the Memorial Day weekend, this year.

Drop in Oil Prices: A Blessing

Profitability of airline companies mostly depends on fuel prices. Last Monday, Brent crude oil price dropped to a new 14-month low to settle at $101.6 a barrel. The West Texas Intermediate (WTI) crude oil also shredded 94 cents to $96.41. Currently, Brent crude oil and WTI crude oil prices remain little changed at $102.46 and $94.55 a barrel, respectively.

Further, crude oil prices are expected to remain less volatile due to strength in global oil supplies. This is good news since the rule of thumb for airliners is - every time the price of oil rises $1 per barrel, it costs $1 billion to the global airline business.

Promising Growth Trends

Nine major carriers – Alaska Air Group, Inc. (ALK), Allegiant Travel Company (ALGT), American Airlines Group Inc. (AAL), Delta Air Lines Inc. (DAL), Hawaiian Holdings Inc. (HA), JetBlue Airways Corporation (JBLU), Southwest Airlines Co. (LUV), Spirit Airlines, Inc. (SAVE) and United Continental Holdings, Inc. (UAL) – earned roughly $3.8 billion in the first half of 2014, more than double the collective profit of $1.6 billion earned during the same period last year. As a result, the airlines are running net profit margins of 5%, up from 2.1% witnessed in the first half of 2013.

Meanwhile, airline profits are set to fly high banking on global aviation industry’s buoyant outlook for the rest of 2014. The International Air Transport Association (:IATA) expects air travel to increase by 5.9% this year, the best since 2011. This might lead to a reduction in airfares by 3.5%. Air cargo volume – an important indicator of business confidence – is predicted to expand 3.1% to $197 billion for 2014. Average jet fuel prices are expected to stay at $124.2 per barrel, lower than $124.5 per barrel in 2013.

Further, consumer spending is expected to increase 3.8% year over year in the third-quarter, while disposable personal income is projected to grow at 1.4%. AAA chief operating officer Marshall L. Doney said: “Consumer spending continues to outpace disposable income, indicating that Americans are comfortable using their credit cards to take one last summer vacation this year.”

3 Airline Stocks to Buy Now

Southwest Airlines Co. operates passenger airlines that provide scheduled air transportation services in the United States. Southwest Airlines posted second-quarter 2014 earnings of 70 cents per share, beating the Zacks Consensus Estimate of 61 cents.

The company recorded a healthy rise in traffic last month. Monthly traffic came in at 10.6 billion, up 6.6% year on year.

As of Aug 19, the carrier reached a fresh 52-week high of $30.92, reflecting a solid return of more than 133% in the past 12 months. In the last month the stock gained 9.7%.

Current year expected earnings growth rate for this Zacks Rank #1 (Strong Buy) stock is 55.7%, much above the industry growth rate of 14.9%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.5, less than the industry average of 24.5. It also has a PEG ratio of 0.73.

United Continental Holdings, Inc. provides passenger and cargo transportation services. United Continental posted second quarter 2014 adjusted earnings $2.34 per share, more than the Zacks Consensus Estimate of $2.22.

In July, Chicago-based United Continentals’ traffic went up 1% from the year-ago period as travelers flew 19.9 billion miles.

Shares of United Continental hit a new 52-week high of $49.36 on Aug 20. In the last month, the stock gained 3.8%.

Current year expected earnings growth rate for this Zacks Rank #1 stock is 60.3%, way above the industry growth rate. It has a P/E (F1) of 10.8x, a significant discount to the industry average. It also has a PEG ratio of 0.43.

Republic Airways Holdings Inc. (RJET) is a holding company which operates Chautauqua Airlines, Republic Airlines and Shuttle America. The carrier’s income from continuing operations for the second quarter of 2014 was at 38 cents per share, couple of cents more than the Zacks Consensus Estimate.

Republic’s preliminary passenger traffic results for July 2014 was more than 1 billion revenue passenger miles (RPMs), a 15% increase over the same period in 2013.

Current year expected earnings growth rate for this Zacks Rank #1 stock is 13.2%. It has an attractive P/E (F1) of 7.6x. It has a low price-to-book ratio of 0.85.A P/B ratio under 3 usually indicates value.

All three airlines have a Zacks Industry Rank in the top 23%, implying that outlook remains positive on these carriers for this year.

Bottom Line

With strong fundamentals and growth prospects, these three stocks are expected to show improved price performance in the near future. While most Airline stocks are expected to benefit from the industry’s progress supported by an uptick in Labor Day passengers, the favorable Zacks Rank of these three stocks may ensure their outperformance.

Read the Full Research Report on LUV
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Read the Full Research Report on JBLU
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Read the Full Research Report on UAL
Read the Full Research Report on SAVE
Read the Full Research Report on HA
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