Air travel demand, which had been hit hard by the pandemic gloom, is gradually returning to pre-COVID levels. This has been possible recently with the gradual resumption of economic activities as pandemic-related restrictions are eased. Administered with jabs, which act as a safety net, more and more people are taking flight. The increase in passenger numbers boosts passenger revenue, which was hit hard when the pandemic peaked. The northward movement in passenger revenue is certainly a very positive development for airlines, as passenger revenue accounts for most of their main routes.
As in most other parts of the world, rising passenger revenues are boosting airlines in the United States. In addition, the demand for air transport (mainly for leisure) is accelerating. This very optimistic scenario is evident from the fact that passenger revenues in the just-concluded Q1 2022 earnings season improved significantly (on a year-over-year basis), resulting in a more than 100% increase in total revenues of the main American airline. players love Delta Airlines DAL, South West Airlines companies LUVs and Alaska Air Group ALK.
The situation should improve with the demand for air transport which should accelerate during the summer season. In fact, the warmer months of this year are expected to be the busiest travel season since the pandemic began. Airlines will likely benefit immensely from this pent-up demand. The surrounding uptrend and brighter outlook make DAL, LUV and ALK attractive investment options. The possibility of high ticket prices, mainly due to soaring fuel prices, is unlikely to deter Americans from resorting to air travel as available cash increases.
Highlighting the Sunny Scenario, another American airline heavyweight United Airlines UAL recently provided an improved unit revenue projection for the June quarter. In a filing with the SEC dated May 16, UAL management forecast that total revenue per available seat mile (TRASM: a measure of unit revenue) for the second quarter of 2022 would increase in the range of 23-25% compared to the actual figures for the second quarter of 2019.
According to the previous TRASM forecast, given last month when the first quarter 2022 results were released, the measure was expected to increase by around 17% compared to the actual figures for the second quarter of 2019. The rise in bookings, mainly for leisure, led to this optimistic orientation. UAL’s second quarter capacity is expected to decline by approximately 14% from second quarter 2019 levels. Due to a likely better traffic scenario, the load factor (% of seats occupied by passengers) will increase likely relative to the second quarter 2019 reading. Adjusted operating margin is still expected around 10%.
The recovery in air travel demand can be measured from data provided by the Transportation Security Administration (TSA). Notably, the number of passengers passing through TSA checkpoints recently was well above levels from a year ago. Indeed, on May 22, 2,350,927 passengers passed through TSA checkpoints, a figure higher than the figure of 2,070,716 recorded on May 22, 2019 (pre-pandemic levels).
Our airline choices
Given the current positive environment and better opportunities in store, we note that aviation stocks should grace its portfolio at this time. Below we feature three stocks that are solid investment options, each carrying a Zacks rank of #1 (Strong Buy) or 2 (Buy). You can see the full list of today’s Zacks #1 Rank stocks here.
Delta Airlines: Improving air travel demand, especially on the home front, is helping Delta. Anticipating a further increase in travel demand, DAL provided a bullish outlook for the second quarter. DAL expects the revenue recovery to accelerate to 93-97% in the second quarter, with unit revenues likely to increase in double digits compared to the second quarter of 2019.
Delta expects to generate strong free cash flow in the June quarter. DAL currently sports a Zacks No. 1 rank. The positivity surrounding the stock is evident as Zacks consensus estimate for current year earnings has jumped 71.6% in the past 60 days. . DAL has a growth style score of B.
South West Airlines: The continued recovery in air travel demand bodes well for LUV. Anticipating a steady improvement in bookings, the carrier expects to turn a profit in the last three quarters of 2022 as well as for the full year. LUV management expects operating revenue to increase by 8-12% in the second quarter of 2022 compared to the level of the comparable period in 2019. LUV sees strong bookings for spring and summer travel.
Southwest Airlines currently sports a Zacks ranking of 1. The positivity surrounding the stock is evident as the Zacks consensus estimate for current year earnings has soared more than 100% over the past 60 last days. Like DAL, LUV also has a growth style score of B.
Our final pick is Alaska Air. Like DAL and LUV, ALK expects the air travel demand scene to brighten as summer approaches. ALK management expects a double-digit percentage increase in yield, unit revenue and pretax margin in the June quarter compared to actuals in the second quarter of 2019. In addition, thanks to strong passenger revenues , ALK expects to make a profit from the second quarter through 2022.
Alaska Air currently carries a Zacks rank of No. 2. The air of optimism surrounding the stock is evident in Zacks’ consensus estimate for current-year earnings revised up 38% over the past 60 last days. ALK has a growth style score of A.
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