March may have been the tipping point for airlines to return to operating profits. Travel is recovering as vaccinations increase, flights fill up, and days when bargain fares are rapidly declining.
These trends have made the sector a winning bet this year:
NYSE Arca Airline Index
is up around 26% against a gain of 11.5% for the
But investors are now turning to summer bookings, and it may take bullish forecasts to push stocks up even further.
We will learn more about the financial health and outlook for the industry this week as five carriers release their first quarter results, following
‘(ticker: DAL) published last week.
United Airlines Holdings
(UAL) kicks off the week with first quarter results expected Monday after the close. United has already released preliminary figures, saying it forecast revenue of $ 3.2 billion in the quarter, down 66% from the first quarter of 2019. That revenue was below forecast by Wall Street, although United has made progress on the path to profitability, saying it turned cash-positive in March.
The airline is expected to accumulate a pre-tax loss of $ 2.8 billion and a loss of $ 7.05 in adjusted earnings per share in the quarter.
If United’s stock follows Delta’s path, however, it could sell out. While Delta’s first quarter results largely met Wall Street’s expectations, its outlook was weaker than expected, pushing its stock down 2.8% on the day it released its results.
Delta also said the recovery is being fueled by leisure travel, while business and international fares remain down more than 80% from pre-pandemic levels. This puts pressure on the economy of the airline’s unit, including its revenue per flight. Without higher margin commercial and international tariffs, total revenues may take longer to recover and operating margins may remain low. United are also a full-service operator who may face similar challenges.
Wall Street is now focusing on pricing as leverage for stocks. “We believe domestic traffic is back, but prices are lagging behind, and we want to know how they plan to raise tariffs over the summer,” Cowen analyst Helane Becker wrote in a note on Friday. .
The other large carrier on the tap is
American Airlines Group
(AAL), which is expected to release its results Thursday before the market opens.
American has also prepared Wall Street with preliminary figures, forecasting a 62% drop in revenue from the first quarter of 2019, amid its previous forecast. The company forecast a net loss of $ 2.7 billion to $ 2.8 billion (excluding tax credits and other benefits of about $ 2 billion, mostly from Cares Act funding). And he forecast a net loss of $ 4.29 to $ 4.41 per share, excluding special credits, compared to consensus forecast for a loss of $ 4.23.
The American will need to offer a healthy outlook to push his stock higher, after gaining 76% in the past six months. This may become more difficult, given its reliance on international routes. American’s operating expenses include much higher interest costs, and its number of shares has been significantly diluted through the issuance of shares.
Morgan Stanley analyst Ravi Shanker, for example, sees stock prices drop to $ 20, from recent prices of around $ 22. “We believe that AAL’s stock will increase with the wave of air traffic returning to the industry and we like its young fleet of aircraft which could limit investment pressure in the critical years to come,” he said. he wrote in a note last week. “However, with the stock up more than 50% since the start of the year, the positioning is not as negative as it used to be, which raises the bar higher.”
The last three airlines to report are
Alaska Air Group
(ALK), all scheduled for Thursday.
The trio are largely focused on the domestic leisure market and are expected to see some of the biggest clawbacks in income. None warned that the results would be lower than expected. Alaska posted a largely positive first reading for the quarter.
Wall Street expects Southwest to post revenue of $ 2.1 billion and a pre-tax loss of $ 1.3 billion. The carrier is expected to post an adjusted loss of $ 1.86 per share.
The southwest should benefit from
(BA) MAX is returning planes to service and increasing corporate reservations now that it has joined a global reservation system. The airline’s domestic network is also at the heart of the recovery, Shanker notes. The analyst raised his stock price target to $ 80, which implies gains of nearly 30% from recent prices around $ 62.
The challenge with Southwest’s action is pricing, however. It trades at 20 times 2022 earnings and 13 times 2023 estimated earnings, at the high end of industry averages.
Spirit should be able to meet or beat expectations: it is a very low cost carrier geared towards domestic leisure and vacation travel. Wall Street is looking for a turnover of $ 459 million and a pre-tax loss of $ 329 million. Adjusted earnings are expected to result in a loss of $ 2.67 per share.
Still, Spirit’s stock has soared – up to 128% in the past six months – that it might be harder and harder to lift it from here. Raymond James’ Savanthi Syth slightly upped his 2021 EPS estimate last week, for example, but maintained a market performance rating on stocks.
“We believe Spirit is exposed to markets that are seeing strong demand and a recovery in prices as 2Q21 approaches,” she wrote. But the airline also bears higher interest charges and has issued equity, diluting earnings per share. And since Spirit already had a lean cost structure as the recession approached, it was not able to generate as much savings as other carriers.
Alaska Air, for its part, prompted investors to expect a positive quarter. The airline said in a statement last week that it was forecasting a 33% drop in revenue from the January 2019 quarter, in line with its previous forecast. It expects passenger revenue to fall 55%, which is at the high end of its previous forecast, and it expects operating cash flow of $ 150 million, beating its forecast previous $ 50 to $ 100 million.
The big hurdle for Alaskan investors could be the rise of stocks. The stock has risen 76% in the past six months to recent prices of around $ 69. Wall Street’s average price target is $ 83. This is an achievable goal, although investors may need to sit still for a while.
Write to Daren Fonda at [email protected]