Airlines Set To Take Off In 2016

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Includes: ALK, DAL, DLAKY, HA, ICAGY
by: Zacks Investment Research

Over the years, airline companies have been at the mercy of fluctuating fuel costs, which has caused significant disruptions in their overall operations. In many cases, company management was compelled to lay off workers and, in a few instances, was forced to close operations and file for bankruptcy. But, after a full year of persistently low fuel prices, airlines have seen improving margins and have been posting positive earnings surprises quarter over quarter. And to the glee of airline companies across the globe, fuel prices are expected to stay subdued throughout 2016 and into 2017.

Traditionally, during the winter months, there is a decline in U.S. oil inventories because of the increased demand during the cold months, and year-end destocking of crude for tax purposes, but like last year, this was not the case for the winter of 2015 as current inventory levels are much more elevated than anticipated.

In their most recent report, the U.S. Energy Information Administration announced while U.S commercial crude inventories fell by 5.1 million barrels, the total inventory was at 482.3 million barrels. This amount of inventory remained at levels not experienced in over 80 years. The news sent oil prices tumbling even further.

To make the environment even more attractive, the U.S. Energy Information Administration stated that, "forecast jet fuel consumption is down slightly in 2016, with improvements in average airline fleet fuel economy offsetting growth in freight and passenger travel." This combined with frugal fuel hedging activity has decreased the volatility and overall input cost for the major airlines.

If the sector was not already attractive, the U.S. EIA also projected that Brent crude oil prices will end up averaging about $56 per barrel in 2016, which might end up being on the high end as the projection for 2015 was $68 per barrel when the actual amount was $53 per barrel. Also, the 2016 estimate price for the West Texas Intermediate (WTI), according to the EIA, is currently at $51 per barrel. When compared to last year's estimates of $63 per barrel against the actual of $49 per barrel, there is even more room for profits.

Even if the EIA's current estimates for Brent and West Texas are correct, airlines would still have very strong margins, and the ability to post improved earnings and revenue numbers in 2016.

With all this positive news for the airline industry, Zacks has identified five companies that are best positioned to reap the gains in 2016.

What Airlines to Look For in 2016

Alaska Air Group (NYSE:ALK) is a Zacks Rank #1 (Strong Buy) and has posted six consecutive positive earnings surprises. In the company's most recent earnings announcement, net income hit a record level with a +39% increase from the year ago quarter.

Over the past 90 days, estimates for Q4 '15, Q1 '16, FY '15, and FY '16 have all increased. As you can see in FY '16, estimates have jumped the most due to the sustained low oil price projection throughout the year. Q4 '15 improved from $1.42 to $1.43, Q1 '16 jumped from $1.22 to $1.35, FY '15 rose from $6.33 to $6.45, and FY '16 vaulted up from $6.77 to $7.12.

As you can see from the graph below, ALK's consistent earnings beats have produced positive price appreciation for over a year.

Delta Air Lines (NYSE:DAL) is a Zacks Rank #1 (Strong Buy) and has also posted six consecutive quarters of positive earnings surprise. The company had recently increased its dividend by 50% and announced a new $5 billion share repurchase program to be completed by YE '17. The company was also able to increase its operating margins to 21% and saw earnings per share grow by 45% in its most recent quarter.

Over the past 90 days, estimates for Q4 '15, Q1 '16, FY '15, and FY '16 have all improved. Like ALK, you will notice that estimates for FY '16 have grown the most. Q4 '15 rose from $1.14 to $1.18, Q1 '16 advanced from $1.06 to $1.13, FY '15 is up from $4.55 to $4.63, and FY '16 jumped up from $5.49 to $6.12.

As you can see in the graph below, Delta has seen significant price appreciation over the past several quarters and is expected to continue to rise through 2016 as oil prices remain under pressure.

Hawaiian Holdings (NASDAQ:HA) is a Zacks Rank #1 (Strong Buy) and has posted a positive earnings surprise in five of the last six quarters. In its most recent earnings announcement, the company posted a +45.7% year-over-year improvement in operating income. Also, the company has $62 million remaining on its stock buyback program after spending $20 million to repurchase 0.9 million shares in the third quarter 2015.

Over the past 90 days, estimates for Q4 '15, Q1 '16, FY '15, and FY '16 have all seen positive revisions. Like our other suggested companies, FY '16 has the biggest jump due to oil prices. Q4 '15 improved from $1.14 to $1.18, Q1 '16 rose from $1.06 to $1.13, FY '15 advanced from $4.55 to $4.63, and FY '16 jumped up from $5.49 to $6.12.

As you can see from the graph below, HA has seen significant price appreciation over the past year of low oil prices and is expected to see further gains in 2016.

International Consolidated Airlines Group (OTCPK:ICAGY) is a Zacks Rank #1 (Strong Buy) and is the holding company of British Airways, Iberia, and Vueling. Recently, the company delivered on its 2015 target of £2.3 billion in operating profit, which is up from the £1.5 billion target three years ago.

While there is limited coverage, estimates for FY '15 and FY '16 have seen significant improvements over the past 90 days; FY '15 rose from $3.85 to $4.15, and FY '16 jumped from $4.54 to $5.48.

As you can see from the graph below, ICAGY has seen a fairly consistent uptrend over the past year and a half.

Deutsche Lufthansa (OTCQX:DLAKY) is a Zacks Rank #1 (Strong Buy) and has posted a positive earnings surprise for the past five quarters. In its most recent earnings announcement, the company posted year-over-year gains in revenues (+7.4%) and EBIT (+58.7%).

Due to a restructuring effort starting in September of 2015, and the persistent low oil prices, the company has seen positive estimate revisions for FY '15, and FY '16 over the past 90 days. FY '15 rose from $2.40 to $3.38, and FY '16 jumped up from $2.51 to $2.99.

As you can see from the graph below, DLAKY experienced a downturn in the latter half of 2015 but has seen a nice trend upwards as of late.

Bottom Line

Many years from now, investors will look back at this point in time and might call this the golden era of airlines. As fuel costs continue to decline, and with efficiency improvements cutting total volume used, airlines will now have the flexibility to introduce new routes, acquire a bigger fleet, and return these overall savings to their shareholders through increased value and dividends.

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