Airlines Weekly Note: US Airlines Recover From Last Week’s Market Volatility

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This week proved to be a positive one for a majority of the US airline companies, as they somewhat recovered from last week’s turmoil in global markets, caused due to investor fears over a potential slowdown in China, the world’s second largest economy. Despite a 10% jump in WTI crude oil prices, the stock price of most of the US airlines went up by an average of 3.7%, excluding Southwest which gained merely 0.3% during the last five trading days. In this note, we look into some of the major events that took place during the week that may have caused this recovery in airline prices.

1 week price

Source: Google Finance

JetBlue Resumes Its Transcon Flights To Palm Springs (California)

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JetBlue Airways (NASDAQ: JBLU), announced its plans to start a seasonal non-stop service between New York’s John F. Kennedy International Airport (JFK) and Palm Springs International Airport (PSP) in Southern California early next year, subject to government approval [1]. The airline decided to resume service to the island, or “desert oasis” as referred to by the airline, because it has become a weekend gateway for younger and trendy travelers over the last few years. The new service will operate on Airbus A320 aircraft five times per week, from January 2016 to May 2016, with complimentary snacks and soft drinks. The seats are already on sale at a promotional fare of $99 one way. While the news did not have much impact on the airline’s stock price, we expect this service to contribute to the airline’s revenues in the near future.

JetBlue-1 week

Source: Google Finance

We have a price estimate of $25 per share for JetBlue, 8% ahead of its current market price.

See Our Complete Analysis Of JetBlue Airways Here

American Airlines To Strengthen Code-Sharing Ties With Japan Airlines

American Airlines (NASDAQ: AAL), which is the founding member of Oneworld alliance, announced its plans to add code-sharing flights with Japan Airlines, which is set to launch flights between Dallas and Tokyo Narita from 30th November 2015 using the Dallas International Airport. Japan Airlines, also a member of the Oneworld alliance and American’s joint business partner, aims to offer four flights per week on the route using Boeing 787-8 Dreamliners fitted with the latest cabin interiors and plans to extend the service to daily flights by spring of next year [2]. American currently operates two daily flights on the same route.

Since American has been facing stiff competition from Delta in the Japanese market, this code-sharing agreement will allow American to cater to the growing Asian market, particularly China. In addition, American’s position in Dallas, which has been adversely impacted by Southwest, may also be strengthened through this agreement.

AAL-1 week

Source: Google Finance

Our price estimate for American Airlines is $49 per share.

See Our Complete Analysis Of American Airlines Here

Alaska Air Continues To Expand Its Capacity Rapidly

Alaska Air (NYSE: ALK) witnessed a 5.4% spike in its stock price on Wednesday, 2nd September 2015, when the airline released its operational performance for the month of August. The key highlights of the release include:

ALK-Aug

Source: Alaska Air’s Operational Performance For August 2015

Alaska Air has been rapidly growing its capacity to defend its leading position in its hometown, Seattle, from rising competition from Delta. Its capacity expansion has been one of the highest in the industry. The airline expects to grow its capacity by 8% in the third quarter, while it will increase its overall capacity by 10% in 2015. While the company does not detail its passenger revenue per available seat mile (PRASM) in its monthly performance, the aggressive capacity additions are likely to weigh heavily on unit revenues (measured by PRASM) and, in turn, on its top line growth. However, the weakness in crude oil prices, coupled with its superior operational performance, will continue to drive the airline’s profits in the third quarter, similar to the last two quarters. (Read: Why Is Alaska Air Ahead Of Its Peers – Part 1 and Part 2)

Our price estimate for Alaska Air stands at $81 per share, approximately 3% above its current market price.

See Our Complete Analysis For Alaska Air Here

Delta’s PRASM Continues To Fall Due To Stronger US Dollar

Delta Air Lines (NYSE:DAL), which announced its operational performance for August 2015 along with its closest competitor Alaska Air, reported a 6.5% decline in its unit revenues due to foreign currency fluctuations, lower surcharges in international markets, and yields in select domestic markets. Despite this, the legacy carrier’s stock shot up by 5.1% on Wednesday, 2nd September 2015, when the results were released. Following is a summary of Delta’s operational performance for August:

DAL-Aug

Source: Delta’s Operational Performance For August 2015

Regardless of the rising competition from Gulf airlines and smaller carriers, Delta grew its system capacity by over 3% on a year-on-year basis driven by new routes in Latin American and Atlantic markets. The airline’s overall system capacity rose by 4% year-to-date, in line with the company’s capacity guidance for the third quarter. After factoring in a drastic fall in its unit revenue, the airline forecasts its 3Q operating margin to be in the range of 19%-21%. Similar to the last quarter, we expect fuel price savings to boost the airline’s earnings in this quarter.

We have a price estimate of $50 for Delta, about 11% ahead of its current market price.

See Our Complete Analysis Of Delta Air Lines Here

United Continental Joined S&P 500 Index

United Continental (NYSE:UAL), began trading as part of the S&P 500 Index after the market closed on Wednesday, September 2, 2015. The Chicago-based airline, which replaced Hospira (NYSE:HSP) which was recently acquired by Pfizer (NYSE:PFE), has been included in the S&P 500 GICS Airlines Sub-Industry Index and is the fourth US airline to feature in the benchmark index after Southwest, Delta, and the most recently added, American Airlines. Though the airline took almost a decade to make it to the coveted index after exiting bankruptcy protection, the news is likely to enhance the airline’s perception in the market, particularly in the current uncertain economic environment. Further, we expect United’s trading volumes to go up, as perhaps some investors will now be willing to trade the stock after it has been “sanctified” by becoming a part of the index.  The airline’s price went up by 7% on 28th August when the news became public.

UAL-1 week

 

Source: Google Finance

See Our Complete Analysis Of United Continental Holdings Here

Southwest Reaches Agreement In Principle With Pilot Union

Almost three years after the pilot contracts became amendable, Southwest Airlines (NYSE:LUV), through its negotiators, reached an agreement in principle with the pilots’ union on the final terms of the contract [3]. The terms of the agreement will not be made public until the contract language is finalized and reviewed by the Southwest Airlines Pilots’ Association (SWAPA) Board of Directors and is voted upon by the airline’s pilots. This process is expected to take at least 45 days once the final contract is cleared by the SWAPA. Though the market did not react much to the news, it could turn out to be favorable for Southwest, if the airline manages to complete the process within the expected time frame.

LUV-1 week

Source: Google Finance

See Our Complete Analysis Of Southwest Airlines Here

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Notes:
  1. JetBlue To Take Off To Sunny And Stylish Palm Springs, California, 31st July 2015, www.jetblue.com []
  2. American Airlines Welcomes Japan Airlines To Dallas, 31st July 2015, www.aa.com []
  3. Southwest Airlines And Pilots Reach Agreement In Principle, 3rd September 2015, www.southwest.com []