Airlines to Soar on Tax Cut, Economic Growth, Better Results

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Airline stocks have rebounded nicely after struggling for most of 2017. Headwinds ranging from flight cancellations and the resultant loss of revenues due to hurricanes and other calamities, high costs and customer dissatisfaction contributed to the sector’s struggles in the year gone by.

However, things are looking up for stocks in the space post-hurricanes. The fact that the overall picture is brightening up for airlines can be made out from the fact that the NYSE ARCA Airline Index has increased 10.9% over the last three months.

Impressive Q4 Highlights Turnaround

The ongoing Q4 reporting cycle has seen major sector participants like Delta Air Lines (DAL), American Airlines Group (AAL), Southwest Airlines (LUV) and United Continental Holdings (UAL) reporting better-than-expected earnings per share and revenues.

Moreover, their performances with respect to unit revenues (a measure of sales relative to capacity for a carrier) have been impressive. More heartening are the projections provided by these key sector participants with respect to this closely watched metric.

For example, American Airlines expects total revenue per available seat miles (TRASM: a key measure of unit revenue) to increase in the band of 2% to 4% in the first quarter of 2018. Southwest Airlines expects first-quarter revenue per available seat mile (RASM) to rise between 1% and 2%.

Non-Fuel Unit Costs Likely to Hurt Less Going Forward

Apart from bullish unit revenues, the bottom lines of carriers are likely to be less severely impacted by non-fuel unit costs going forward. This is evident from the improved outlook provided by the key sector players with respect to cost per available seat miles (excluding fuel).

For example, Southwest Airlines expects unit costs (excluding fuel and oil expense, profit-sharing and special items) to grow in the band of 0.5-1.5% in the first quarter of 2018. The projection is favorable compared with the 4.1% rise in the metric in the fourth quarter. American Airlines expects unit costs (excluding fuel and special items) to increase 2% year over year in 2018, which again is better than the reading in the fourth quarter of 2017.

Tax Cuts and Jobs Act to Boost Airlines

Airlines are expected to get a significant boost from the new tax law (Tax Cuts and Jobs Act). The optimism can be made out from the fact that the likes of American Airlines, Southwest Airlines, Alaska Air Group (ALK) and JetBlue Airways (JBLU) declared bonuses following the tax reform.
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American Airlines stated on its fourth-quarter conference call that it expects to receive cash tax refunds to the tune of approximately $170 million in both 2019 and 2020 pertaining to the repeal of the corporate alternative minimum tax.

Moreover, in the new tax scenario, companies will be able to deduct their capital expenditures from taxable income immediately, which was not allowed earlier. This provision will benefit airlines hugely as they spend extensively on this front.

Furthermore, the huge savings due to the reduction in corporate tax rate implies that more cash will be available to fund their capital expenditures, acquisitions and share repurchases among others. This means good news for shareholders too as dividend hikes and more buybacks are likely going forward.

Improving Domestic Economy Bodes Well

With the domestic economy on a solid footing, it is of little surprise that U.S. stock markets are hitting all-time highs on a fairly regular basis.  Bullish domestic data released recently are indicative of the healthy position of the U.S. economy.

Improvement in domestic economy bodes well for travel-focused stocks like airlines. With consumer confidence remaining strong, more and more Americans are taking vacations. Further, cheap ticket prices have been an added incentive for consumers, who are benefiting from a much-improved job market and rising disposable income.

IATA Forecast Hints at More Profits in 2018

IATA predicts global net profit of $38.4 billion for the industry in 2018. This is much higher than the profitability forecast of $34.5 billion for the current year. The bright projection can be attributed to strong demand for air travel. The bulk of the global profits in 2018 is expected from the North American region ($16.4 billion). The estimated figure is higher than that in 2017.

The top line is projected to come in at $824 billion in 2018 compared with $754 billion projected for 2017. According to the forecast, load factor (percentage of seats filled by passengers) for 2018 is expected to touch record levels of 81.4%.

According to the report, yields are expected to improve 3% in 2018. The research firm has also predicted that the average net profit per departing passenger would be $8.90 per passenger in 2018 compared with $8.45 in 2017.

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American Airlines Group, Inc. (AAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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