IATA forecasts record profit of $35.6B this year for the airline industry, a downward revision from a prior prediction of $39.4B.
A profit margin of 5.1% is anticipated for airlines in 2016.
Looking ahead, IATA warns on the impact of higher oil prices next year. Jet fuel prices are expected to increase to $64.90/bbl from $52.10/bbl this year. Traffic is seen slowing to 5.1% growth and load factor is seen slipping below 80%.
IATA says the strongest region next year will be North America with net post-tax profits of $18.1B.
Wolfe Research analyst Hunter Keay isn't worried that higher oil prices in the future will be a negative for airline companies.
He thinks the impact of capacity discipline is more important than the bottom line of a lower fuel spend. Keay's analysis is below.
"Multiples drive about 70 percent of the movement in stock prices. And multiples are dictated by the perception of pricing power, and pricing power is dictated by capacity control. Excess capacity drives pricing down... It’s not about profits, it’s about how they make the profits, about pricing power. Capacity discipline and fundamental behaviors are far more important than the amount of money they earn."
Oil prices are up 0.7% on the day, but have dropped sharply over the last month.
Don't count out airline stocks as growth stocks just yet. A forecast from the IATA calls for a doubling of the number of global passengers to 7.2B by 2035.
The CAGR (compound average growth rate) on the outlook works out to 3.7%, with steady growth across regions (China +4.7% CAGR, North America +2.8%, Europe +2.5%, Latin America +3.8%, Middle East +4.8%, Africa +5.1%).
General Electric (NYSE:GE) was yesterday's biggest laggard among Dow stocks, sinking 1.6% after reporting a 2% drop in orders for Q2, with industrial orders - GE’s jet engines, power turbines, oil production equipment, et. al. - plunging 16% amid weakness in oil and gas prices that hurt demand.
"The texture of this quarter is very similar to the two most recent quarters, with exceptionally weak orders,” says Morgan Stanley's Nigel Coe, who rates GE at Equal Weight with a $32 price target.
GE's total Q2 revenues rose 15% Y/Y to $33.5B, but organic industrial sales excluding the Alstom acquisition fell 1%; GE needs to meet its own expectations for a substantial upturn in organic trends in H2 in an "extremely challenging" environment, Coe says.
"Those are capital intensive purchases and if those get pushed out even just a little bit" it could weaken GE's performance, says Edward Jones analyst Jeff Windau.
Andrew Elofson at Davidson Investment Advisors takes the long view, seeing Q2 as "a speed bump on the path to their transformation” and not really looking at whether GE can hit its 5% organic sales growth target for H2.
But Standpoint Research’s Ronnie Moas responded to the Q2 results by slapping a Sell rating on GE with a $26 price target, seeing no reason to own the shares that trade at more than 20x 2016 EPS estimates while "dozens" of mid-cap names with room to grow trade at or below 10x earnings - such as YRCW, TGI, AVH, GBX, ARII, CBI, UAL, SPR and ACM.
Airline stocks are making strong gains on a flurry of positive news.
The investment in LATAM Airlines (LFL +23.9%) by Qatar Airways is having a ripple effect across other global carriers. Copa Holdings (CPA +7.9%), Avianca Holdings (AVH +8.1%), and Go Linhas (GOL +7.8%) are all solidly higher.
In the U.S., a stronger-than-anticipated report from United Continental (UAL +7.7%) on its key Q2 revenue metric is the highlight along with a sweeping upgrade from Deutsche Bank.
The investment firm raises United, American Airlines Group (AAL +8.6%), and Delta Air Lines (DAL +4.7%) to Buy from Hold.
"We are of the view that all known negatives (Brexit, tepid global economic growth, over-supplied markets, etc.) are more than fully discounted in the share prices which are, on average, trading at 6.4x our 2016 EPS estimates and 6.8x our 2017 EPS estimates," reads the note from DB.
Alaska Air Group (ALK +4.3%), JetBlue Airways (JBLU +4%), Southwest Airlines (LUV +3.4%), and Spirit Airlines (SAVE +3.3%) are all higher as well.
The U.S. Global Jets ETF (NYSEARCA:JETS) is up 3.86% on the day.