US Airlines: So Far In This Month

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US airlines are likely to end the year on a high note, as the outlook for oil prices continues to remain bleak due to OPEC’s plan to maintain its current levels of oil production, at least for the next six months. The stocks of the top US airline companies went up by an average 6.5% within two days of the cartel’s decision to refrain from cutting oil production and to defend its market share. While this is a reason to cheer for the airline industry in general, there were some events that also had an impact on the airline stocks in the last two weeks. Let’s quickly look at some of these events, and assess their impact on the airlines.

Airlines-UAL

   Source: Google Finance

American Airlines Restricts Capacity In November; Plans To Launch Premium Economy On International Flights

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After constantly expanding its capacity over the last few months, despite fears of an oversupply of seats in the market, American Airlines has finally restricted its system capacity to meet its 1% capacity growth target for full year 2015. The airline’s latest traffic release pointed out that its capacity fell marginally by 0.2% in the last month, while its passenger traffic grew by 4.3%, a record growth for the month [1]. While the airline continues to expect a 5-7% drop in its unit revenue for the December quarter, we think that foreign currency fluctuations and competition from low cost carriers has finally forced the airline to contain its capacity growth.

However, the Fort Worth-based airline is making all efforts to improve its revenue streams. In this effect, the world’s largest airline has announced its plans to launch premium economy seats on its international flights, beginning late 2016 [2]. This new product will offer more legroom, wider seats, on-demand entertainment, priority check-ins and boarding, and enhanced meal service among other benefits. The network carrier aims to offer this product on its Boeing 787-9 aircraft by 2016, on its Airbus A350s by 2017, and on all Boeing 777-300ERs, 777-200ERs, 787-8s, and Airbus A330s over the next three years. We expect that this new product will enhance the airline’s passenger traffic, leading to an improvement in its top-line growth.

See Our Complete Analysis For American Airlines Here

United Continues To Grow Capacity; To Resume Free Snacks On Flights

Unlike American Airlines, United Continental grew its system capacity at 1.9% during November, while its passenger traffic increased notably by 4.2% [3]. Despite the frequent shift in its top management, the airline reported an improvement of 1.8% in its load factor (occupancy rate per flight) and 3.3% in its on-time performance. In addition, given the slower-than-expected recovery in crude oil prices, the company expects its fourth quarter fuel price to average at around $1.81-$1.86 per gallon, lower than its previous guidance of $1.85-$1.90 per gallon. Thus, we forecast that the network carrier is set to deliver another record quarter on the back of depressed fuel costs.

On a separate note, the Chicago-based airline plans to resume the facility of complimentary snacks on a number of its flights within North America and to Latin America, beginning in February 2016 [4]. This move is targeted at improving the customer’s travel experience, and is aimed at enhancing the airline’s passenger traffic. We expect to see a marginal improvement in the network carrier’s revenue as a result of this new service.

See Our Complete Analysis For United Continental Here

Delta’s Unit Revenue Shows Signs Of Recovery; Airline To Enter India Through A Codeshare Agreement

While its closest competitors continue to face a decline in their unit revenue, Delta posted a 1.5% rise in its unit revenue for November driven by the airline’s winter capacity and higher traffic due to Thanksgiving, partially offset by foreign currency headwinds [5]. Consequently, the Atlanta-based airline expects its unit revenue to reach the high end of its guidance range of a 2.5%-4.5% decline. Thus, we infer that the airline is likely to experience a rise in its top-line in the December quarter. However, the network carrier projects its fuel price to average at $1.82-$1.87 per gallon, higher than its previous guidance of $1.75-1.80 per gallon, primarily due to early settlement of fuel hedges during the fourth quarter. As a result, the airline’s profits are likely to be marginally lower than its prior guidance.

Apart from this, Delta continues to focus on expanding its operations in the Asian markets. In this quest, the third largest airline by traffic has announced a codeshare agreement with Jet Airways to offer flights in India, commencing in March 2016. With these flights, passengers traveling from the US and Europe will be able travel to a number of destinations in India, such as Mumbai and Delhi. Hence, we estimate that this codeshare agreement will strengthen Delta’s presence in the Asian markets.

See Our Complete Analysis For Delta Air Lines Here

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Notes:
  1. American Airlines Report Traffic Results For November, 9th December 2015, www.aa.com []
  2. American Airlines To Launch International Premium Economy, 9th December 2015, www.aa.com []
  3. United Announces Traffic Results For November, 8th December 2015, www.unitedcontinentalholdings.com []
  4. United Airlines To Introduce New Signature Snacks, 9th December 2015, www.unitedcontinentalholdings.com []
  5. Delta Announces Traffic Results For November, 2nd December 2015, www.delta.com []