A sunny-skies forecast for plane travel this summer may be just the thing to extend the rally in airline stocks.
According to trade and lobbying group Airlines for America, US airlines will carry a record 222 million passengers between June 1 and Aug. 31, topping the summer of 2007 when 217.6 million people flew.1
That figure also includes 31 million travelers on international flights, which would also be a record.
On average, the forecast said, there will be 2.4 million passengers each day during that time, 4.5% more than last summer.
As an Associated Press story pointed out this week, US airlines are now quickly adding more seats – including 4.6% more this summer – after several years of limiting their expansion. Those added seats are mostly the result of airlines of flying larger planes and packing in extra rows to existing jets.
According to the AP, those extra seats have given pause to some Wall Street analysts who worry that airlines might have to discount fares to fill them. That hasn’t happened yet, but after years of steadily rising airfares, the cost of a roundtrip domestic ticket for this summer is actually down less than 1% from last summer.
Still, some analysts see a slight bump in capacity not becoming a huge obstacle for the performance of stocks of airline companies. Gary Bradshaw of Hodges Capital Management recently told CNBC that he sees the sector as poised to move higher, given relatively low capacity on a historical basis, consolidated operations, pricing power, and improving operating margins.2
Bradshaw also said he expected that oil would stabilize in the $55 to $65 a barrel range and that will benefit airlines.
“They are all giving cash back to shareholders, returning cash in the way of dividends, they have got great share buybacks and we just think this is a buying opportunity and that looking out over the next 12 months, the airlines will be a lot higher,” Bradshaw said.
Lower fuel costs have certainly contributed to the recent strength in airline stocks. Over the past 12 months, the Taking Flight motif has increased 28.5%. In that same period, the S&P 500 has gained 15.2%.
In the past month, the motif has risen 3.3%; the S&P 500 is up 1.6%.
Another possible plus going forward for airline stocks is that several of them have low valuations by traditional metrics. In a recent report, Barron’s published its list of the cheapest stocks in its Barron’s 500 in order of lowest price-earnings ratio.3
Last year, a similar list by Barron’s saw the group of 20 cheapest stocks rising an average of 20.7%, far outpacing a gain of 13% in the S&P 500.
While that implies no guarantees about performance this year, it’s interesting that the two cheapest stocks on Barron’s new list are American Airlines and United Continental, which have a combined 21.9% weight in the Taking Flight motif.
Many investors in airline stocks must feel they’re sitting pretty amid the possible combination of record passenger demand and cheap valuations but those who have followed the airlines industry know it’s an industry that experiences turbulence with regularity.
1Associated Press, “Summer Skies: Airlines to Fly Record Number of Passengers,” nytimes.com, May 18, 2015, http://www.nytimes.com/aponline/2015/05/18/us/ap-us-summer-flights.html.
2Ritesh Anan, “Over The Next 12 Months Airline Stocks Will Be ‘A Lot Higher,’ And Here’s Why,” benzinga.com, May 17, 2015, http://www.benzinga.com/media/cnbc/15/05/5516837/over-the-next-12-months-airline-stocks-will-be-a-lot-higher-and-heres-why.
3Jacqueline Doherty, “Airline Stocks Top the List of Barron’s 500 Bargains,” barrons.com, May 2, 2015.