Zacks Industry Outlook Highlights: Embraer, Delta Air Lines and United Continental Holdings

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Apr 03, 2014, 09:30 ET

CHICAGO, April 3, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Airlines, including Embraer SA (NYSE:ERJ-Free Report), Delta Air Lines Inc. (NYSE:DAL-Free Report) and United Continental Holdings Inc. (NYSE:UAL-Free Report).

Industry: Airlines

Link: http://www.zacks.com/commentary/31988/

In the base-case scenario, there are several dynamics that will act as driving factors for the overall airline profits in 2014. These include:

Passenger & Cargo: Solid air travel demand, growth in ancillary revenues and economic recovery in Europe and North America are expected to drive growth. IATA is projecting global airline passenger growth of 5.8% and average industry load factor 80.2% this year. The improved supply-demand balance globally is expected to result in modestly lower passenger yield this year.

Fuel Price Effect: Airline profit outlook depends on fuel prices, the major variable component in the industry. For 2014, average oil prices are expected to stay at $108.0 per barrel, lower than $111.8 per barrel in 2012 and around $108.8 in 2013, primarily due to increased fuel supply in North America. Lower fuel prices are beneficial to airlines. But if the price reduction is due to weak demand on account of economic issues, then it's a net negative for the carriers.

Service and Fleet Restructuring: many carriers are scrapping flights in small and unprofitable airports in order to reduce costs, with bottom-line concerns trumping market share gains. To that end, the companies are replacing old and depleted airplanes with new and upgraded ones. Though initially expensive, new and improved aircraft are more fuel efficient than the existing ones and will help in lowering operating and maintenance costs.

Over the next 20 years, global airlines are expected to invest in excess of $4 to $5 trillion in fleet development. Apart from the high demand from the oil rich Gulf nations, a major part of the fleet demand will also be driven by China, India and continuous expansion of low budget carriers around the world. For this, the airlines are banking on top aircraft manufacturers such as The Boeing Company, Embraer SA (NYSE:ERJ-Free Report) and Airbus.

Over the long run, the carriers aim to replace their old narrow-body jets – A320's/B757-200/300 – with advanced narrow-body airplanes such as A-321, A320 Neo and the B737 Max, for better service and demand-supply equilibrium.

Delta Air Lines Inc. (NYSE:DAL-Free Report) plans to replace two-third of its older 50-seat regional less efficient aircraft with Boeing's 717-200 and 737-900 aircraft over the next two year. This fleet is already generating superior margins in markets where it is already deployed and expected to further enhance domestic capacity.

Jet Renovation: With passengers demanding comfort and quality service along with proper security, airlines are focusing on aircraft redesigning with new and attractive products and services within the travel plan.

United Continental Holdings Inc. (NYSE:UAL-Free Report) is offering premium flat-bed cabin seats on every long-route international flights. Further, the carrier has installed in-seat power on more than half of its mainline flights and has revamped the interiors of most of its Airbus fleet. Delta also plans to invest $750 million over the next two-year period to roll out Wi-Fi as well as renovate the interiors of its narrow-bodied aircraft over the next three years.

Hedging Strategies: Hedging strategies are used by airline companies to cope with the rising fuel prices. The carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge.

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