Zacks Industry Outlook Highlights: Southwest Airlines, Delta Air Lines, United Airlines, American Airlines Group and JetBlue Airways

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Dec 02, 2014, 09:30 ET

CHICAGO, Dec. 2, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Airlines, part 2, including Southwest Airlines Co. (NYSE:LUV-Free Report), Delta Air Lines (NYSE:DAL-Free Report), United Airlines (NYSE:UAL-Free Report), American Airlines Group Inc. (Nasdaq:AAL-Free Report) and JetBlue Airways Corp. (Nasdaq:JBLU-Free Report).

Industry: Airlines, part 2

Link: http://www.zacks.com/commentary/35649/is-it-the-right-time-to-buy-airline-stocks

The airlines industry is poised for strong growth in the near future. In the recently concluded third quarter of 2014, most airlines companies posted solid numbers despite the Ebola outbreak and unfavorable economic conditions. Improved momentum on the freight side and the downtrend in oil prices coupled with increased demand for passenger traffic provide the tailwind for the industry.

As per the World Tourism Organization (UNWTO), in the first eight months of 2014, foreign tourist arrivals rose 5% globally as compared with the same period in 2013. For full-year 2014, they are expected to grow between 4% and 4% annually. This is likely to act as a long-term positive for the airline industry.

In addition, the industry is gearing up to counter the widespread occurrence of infectious diseases like Ebola, SARS and Avian Flu which may significantly hamper travel plans. In keeping with this, International Air Transport Association (IATA) recently rolled out an Emergency Response Plan and Action Checklist which aim at limiting the spread of such diseases.

We discuss a few factors of the airlines sector that investors should consider and look forward to in the coming months:

Opportunities

We believe industry-wide consolidation and various sources of ancillary revenues will boost profits and cost performance of most air carriers going forward. This is a suitable time for companies to make strategic collaborations in a bid to enhance profits and operational efficiency.

Mergers & Acquisitions: Airline companies merge to restore profits and broaden the area of their operations. This is apparent from the past mega-mergers within the industry including the ones between Northwest Airlines and Delta Air Lines in 2008, United Airlines and Continental Airlines in 2010 and AirTran Holdings and Southwest Airlines Co. (NYSE:LUV-Free Report) in 2011. All three companies -- Delta Air Lines (NYSE:DAL-Free Report), United Airlines (NYSE:UAL-Free Report) and Southwest Airlines -- are long-term beneficiaries on capacity and cost fronts.

The recent collaboration between U.S. Airways Group Inc. and AMR Corporation has created the largest global carrier, American Airlines Group Inc. (Nasdaq:AAL-Free Report). Despite the merged entity enjoying more pricing power and control over a larger number of slots, we believe it will have little effect on the dynamics of the U.S. aviation industry as 80% of the market will be dominated by the new American Airlines, United Airlines, Delta and Southwest Airlines.

Additional Revenue Gains: Air carriers are increasingly focusing on passenger satisfaction to drive growth. JetBlue Airways Corp. (Nasdaq:JBLU-Free Report) enhanced its TrueBlue loyalty program by allowing a single customer to earn and use points as a group, while Delta has upgraded its Economy Comfort seating in all transcontinental flights operating from New York's JF Kennedy Airport to Los Angeles, San Francisco and Seattle. The IATA projects total revenue of $746 billion in 2014 from an estimated 3.32 billion passengers traveling this year. Meanwhile, American Airlines plans to offer various attractive perks to the US Airways Dividend Miles club members by clubbing the program with the existing AAdvantage loyalty in the second quarter of 2015.

Expansion: North American carriers are relentlessly focusing on expansion of their range of domestic and international flights. Recently, United Continental announced plans of launching four new Pacific routes to fortify its presence in the region. The company also launched non-stop flights between Los Angeles and Melbourne and between San Francisco and Haneda airport in Tokyo. Meanwhile, flights from its Guam hub to Seoul and Shanghai began Oct 27 and Oct 28, respectively. The company further plans to introduce services to Chile, the Dominican Republic and Belize starting Dec 2014.

Delta Airlines is strengthening its position in Seattle by adding several domestic and international destinations from the western coastal city in addition to reinstating its Barbados operation after a gap of three years. Likewise, after operating for several decades within the U.S. domestic market, Southwest Airlines is finally foraying into international territories, with introduction of flights to the Caribbean.

New Choices: The creation of American Airlines has opened up new opportunities for Southwest Airlines, JetBlue and Virgin America as the merged entity has divested take-off and landing slots at Washington's Reagan National Airport (DCA) and New York's LaGuardia Airport (LGA). Further, American Airlines is currently in the process of divesting gates and related facilities at each of the Boston, Chicago, Dallas, Los Angeles and Miami airports.

Meanwhile, JetBlue signed an interline agreement with British Airways. The two carriers will incorporate 18 daily transcontinental British Airways flights, more than 50 routes within the U.S. and over 100 routes outside London.

Technology Upgrades: Air carriers are opting for numerous technology upgrades and system automation for activities such as airline reservation, flight operations and website maintenance. These upgrades allow companies to function effectively and efficiently, minimize expenses and render better customer service. A4A believes that such up gradation program has compelled the airlines industry to spend nearly $10 billion in capital infrastructure in the first nine months of 2014.

Moreover, availability of faster in-flight Wi-Fi connectivity has encouraged these carriers to roll out entertainment services for travelers. Recently, United Airlines has introduced a new application called United app, which will allow passengers to access a wide range of movies and television shows while on board through Wi-Fi-enabled mobile devices and laptops.

Deployment of on-board wireless services and installation of the Automated Passport Control (APC) kiosks will continue to drive the sector's modernization program. APC will allow international passengers to enjoy faster and smoother passport clearance. Further, mobile boarding pass is a new technological advancement that allows passengers to use smartphones to get through security check points and board flights sans any inconvenience or delay. In Singapore, the Changi airport has started electronic feedback system which is helping the airport authorities to provide better service.

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