• Wed. Oct 5th, 2022

3 Stocks to Watch in the Airline Industry Omicron-Variant Hit – January 24, 2022

The spread of the highly transmissible COVID-19 variant (strain B.1.1529) in many countries around the world, including the United States, is the latest setback for the Zacks Transportation – Airline industry. First identified in South Africa, the Omicron strain has so far caused multiple flight cancellations, particularly in the United States, hampering holiday travel plans. Bearish Q1 2022 revenue forecasts from several airline heavyweights further attest to the omicron-induced crisis for the industry.

The increase in the price of oil is another negative point for the players in the industry with regard to the growth of their bottom line. However, the resumption of air traffic in places like Latin America is positive. This development bodes well for carriers like Azul (AZUL free report), Copa Holdings (PCA free report) and Gol Linhas Aereas Inteligentes (GL free report).

Industry overview

Zacks Airline’s industry includes companies engaged in the transportation of passengers and cargo to various destinations, worldwide. Most operators maintain a fleet consisting of several primary jet aircraft in addition to several regional aircraft. Operations are supported by their regional airline subsidiaries and third-party regional carriers. Additionally, industry players use their respective freight divisions to offer a wide range of freight and courier services. The well-being of companies in this industry group is tied to the health of the economy as a whole. For example, the spread of the omicron variant of COVID-19 in most parts of the world has caused multiple flight cancellations as crew members have fallen ill from the highly contagious strain. This development has disrupted the holiday travel plans of many people in the United States, which has had the effect of reducing airline passenger revenues.

Key topics governing the airline industry

Omicron-Variant Spread Stings Airlines: He agreed that the airspace had performed much better in 2021 than the coronavirus-ravaged scenario in 2020. However, airlines seem to be on their backs again with a slew of flight cancellations in recent weeks. Omicron-induced staffing shortages and weather issues prompted US carriers to cancel several flights, upsetting the travel plans of many passengers. Some carriers have even reduced their schedule for the current month.

Even though the fourth quarter 2021 earnings season is in its infancy, airline players who have already released their numbers have provided a disappointing outlook for the March quarter, particularly on the revenue front, due to the crisis caused by omicron.

The deployment of 5G fears an additional misfortune: CEOs of major U.S. airlines have warned of a catastrophic aviation crisis if telecom companies roll out 5G “C-Band” service, according to a Reuters report. Some carriers have warned that many flights could be affected if 5G signals cause limited interference with altitude instruments in certain weather conditions. Airlines are primarily concerned about the rollout of 5G causing poor readings by altimeters (devices that use radio frequencies to measure the distance between planes and the ground and help planes land in bad weather). Even though airlines have breathed a sigh of relief with the temporary delay in rolling out 5G at major airports, the overhang will remain unless a permanent solution to the problem is found.

The price of oil could rise in 2022, hurting the bottom line: The United States Energy Information Administration (EIA), in January 2022, raised its oil price forecast. The EIA, in its short-term energy outlook for the current month, said it expects the average Brent spot price to be $74.95 per barrel for the full year. This marks an increase from its December forecast in which it forecast the average Brent spot price to be $70.05 per barrel for 2022. It forecasts the same at an average of $78.63 per barrel at during the first quarter of 2022. This estimate is $5.63 a barrel higher than its previous one. prediction.

The EIA’s higher forecast for oil prices is a headwind for airlines and could hurt earnings growth. Indeed, fuel expenses represent one of the highest entry costs for these players.

Zacks Industrial Ranking Indicates Bearish Outlook

The Zacks Airline industry is a group of 28 stocks within the broader Zacks Transportation industry. It currently carries a Zacks Industry Ranking of #247, which places it in the bottom 3% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates a weak near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

Before discussing a few stocks in the industry, it’s worth taking a look at the industry’s shareholder returns and current valuation.

The industry underperforms the sector and the S&P 500

Primarily due to the omicron-triggered woes, the Zacks Airline industry has underperformed the Zacks S&P 500 composite as well as the sector over the past year.

The industry fell 12.3% over that period compared to a 14.4% rise for the S&P 500. The broader Zacks Transportation sector rose 3.7% over the same period.

Year-over-year price performance

Current industry assessment

The Price/Sales (P/S) ratio is often used to value airline stocks. The industry currently has a 12-month forward P/S of 0.55X versus the S&P 500’s 4.46X. It’s also below the sector’s 12-month forward P/S of 1.95X.

Over the past five years, the industry has traded as low as 1.01X, as low as 0.37X and at the median of 0.71X.

12-month forecast price-to-sales ratio (last five years)

3 airline stocks to watch

Azul: This Brazilian carrier currently carries a Zacks Rank #2 (Buy). The carrier is benefiting from improving air travel demand in the South American country. Obviously, domestic traffic in Azul for December is up 20.9% from the reported figure for December 2019 (pre-coronavirus levels).

Additionally, strong e-commerce growth is driving revenue for Azul’s freight business unit. In the third quarter of 2021, freight and other revenue increased 11.5%, sequentially, and more than 100% from the 2019 level, primarily due to upbeat demand for Azul’s logistics solutions. Cargo revenues are also expected to have been strong in the fourth quarter.

Shares of the carrier are up 10% over the past month. Zacks’ consensus estimate for fourth-quarter 2021 net income stands at a loss of 57 cents, following a loss of 90 cents 90 days ago.

You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here

Pricing and Consensus: Azul

Gol Linhas Intelligent Areas: This Brazilian carrier currently carries a Zacks rank of 3. Like Azul, Gol is also benefiting from an improvement in air travel demand in the country. The airline expects demand to increase by 15.4% in the fourth quarter of 2021 compared to the level of the previous year, while capacity is expected to increase by 13.2%.

Gol Linhas predicts that total net income in 2022 will exceed pre-pandemic (2019) levels. Zacks’ consensus estimate for fourth-quarter 2021 net income narrowed to 51 cents from 53 cents 60 days ago.

Pricing and Consensus: GOL

Copa Holdings: This Panama City, Panama-based carrier currently carries a Zacks Rank #3 (Hold). Thanks to the increase in vaccinations, the carrier is seeing an improvement in air traffic. We are also encouraged by the airline’s initiatives to modernize its fleet. In addition to adding aircraft, this carrier is replacing obsolete models as part of its fleet modernization efforts. Its liquidity position is also impressive.

Shares of the carrier have gained 11.3% over the past six months. Zacks’ consensus estimate for fourth-quarter 2021 net income rose to $1.05 from 37 cents 90 days ago.

Pricing and Consensus: CPA