Thanks to a number of different factors, airline sector stocks have been on a tear. And thanks to an inverse relationship with the price of oil, strengthening consumer sentiment, the expected increase in business travel, and the (eventual) arrival of spring and summer, the airline sector looks poised for further gains.
Oil prices experienced sharp gains between 2007 and mid-2008, subsequently tanking in step with the stock market and bottoming in early 2009. Since 2010, oil prices have risen in the shadows of the sputtering U.S. economy—neither soaring nor really pulling back.
That said, oil futures slid last week immediately after weekly data came out that showed U.S. crude oil supplies were up more than forecast. Analysts had expected crude oil inventories to climb from 1.4 million barrels in the last week of February to 2.1 million barrels for the week ended March 7. Instead, oil inventories surged to 6.2 million barrels. (Source: “Summary of Weekly Petroleum Data for the Week Ending March 7, 2014,” U.S. Energy Information Administration web site, March 12, 2014.)
Oil prices are also down after the U.S. said it would hold its first test sale of crude oil from its emergency stockpile since 1990. While the government insists its modest offering of 5.0 million barrels of crude is a result of the dramatic increase in domestic crude oil production…others think it might be a subtle nod to Russia. The markets don’t seem to care either way. Oil prices are down 6.5% since the beginning of March, trading near $98.00 per barrel.
Now granted, the price of crude oil will rebound. That said, the airline sector can accommodate steadily rising oil prices more easily than oil prices that spike like they did in 2008.
Coupled with lower oil prices is the rise in consumer confidence. The Bloomberg Consumer Comfort Index climbed last week to -27.6 for the week ended March 9 from -28.5 a week earlier. This was the fifth straight advance and the second-highest level since mid-August, which suggests this is the most optimistic investors have been about the economy over the last seven months. Improving economic conditions as we head into the spring and travel-heavy summer months could also be a boon for the airline sector. (Source: Peralta, K., “Consumer Comfort in U.S. Rises to Second-Highest Since August,” Bloomberg, March 13, 2014.)
On top of that, improved business travel could improve airline sector yields. Business travel accounts for almost 30% of all booked airline sector flights, and improved economic conditions could boost sales.
U.S. business travel volume increased in the first two months of 2014, and is expected to almost double its rate of growth by the end of the year. Spending on U.S. business travel is forecast to increase by 6.6% to $289.8 billion in 2014, versus growth of 3.8% in 2013 and 4.4% in 2012. Spending on group travel for meetings is also expected to grow this year by 6.5% to $124.5 billion, the highest level since 2011. (Source: “Reality Check: U.S. Business Travel Grew Faster in Early 2014,” MNI web site, March 7, 2014.)
While the North American airline sector will have to absorb the cost of cancelled flights during the first quarter, the airline sector could experience solid gains in the second and third quarters.
In addition to looking at revenue and earnings—those interested in adding airline sector stocks to their investment portfolio need to consider the break-even load factor, revenue passenger mile, and yield per revenue passenger mile.
Three North American airline sector stocks flying under the radar include: Hawaiian Holdings, Inc. (NASDAQ/HA), Alaska Air Group, Inc. (NYSE/ALK), and JetBlue Airways Corporation (NASDAQ/JBLU).