August 23, 2017

Growing Traffic May Not Actually Be Helping Airlines

Source: Barron's

Traffic has been very strong in 2017, but airlines aren't necessarily benefiting from higher revenues.

Vertical Research Partners’ Robert Stallard and his team recently looked at the airline sector, now that second-quarter earnings are largely over.

Stallard writes that that most investors are aware that traffic growth has been stronger than expected year to date, at 7.9% in the first half, compared to 5.3% first-half growth last year, and higher than any first-half average since 2010.

That said, he warns that airline traffic is a “raw” data point, as it may not necessarily translate into benefits for airlines themselves. So looking beyond traffic to revenues, cost, and profits, Stallard writes that his analysis shows that using just traffic growth as the lead indicator in the space is not very wise. While the airlines have enjoyed good revenue growth in the first half of this year, that has been more than offset by increased fuel and non-fuel costs, and operating profit has actually declined from the year ago period.

So what should investors take away from this? He writes that rising revenues and cost cancel each other out on a global basis, but that the distribution isn’t evenly balanced, as, for example, U.S. carrier are still “comfortably” profitable this year, while those in the Middle East and Asia are not.

All in all, he writes that airline results in the first half support the continued aerospace upcycle, but there are some areas that investors should be wary of and watch more closely. And with so much optimism in the stocks, he only sees limited upside at the moment. He likes Transdigm (TDG) and Airbus.

Major U.S. airlines including Delta (DAL), United (UAL), American Airlines (AAL) and Alaska (ALK) have all seen their stocks fall year to date.

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