• Wed. Oct 5th, 2022

3 Stocks to Watch in the Omicron-Variant Hit Airline Industry

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 Zacks Transport – the airline industry. First identified in South Africa, the Omicron strain has so far caused several flight cancellations, particularly in the United States, hampering vacation travel plans. The bearish revenue forecast for the first quarter of 2022 by several aircraft heavyweights bears further testimony to the omicron-induced crisis for the industry.

The increase in the price of oil is another negative for industry players as far as their lower online growth is concerned. However, the resumption of air traffic in places like Latin America is a positive factor. This development bodes well for carriers like Azul AZUL, Copa Holdings (NYSE:) CPA and Gol Linhas Aereas Inteligentes GOL.

Industry overview

The airlines industry includes Zacks companies engaged in transporting passengers and cargo to different destinations, globally. Most operators maintain a fleet consisting of several mainline jets, in addition to several regional aircraft. Operations are aided 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 businesses 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 induced multiple flight cancellations as crew members fell ill due to the highly contagious strain. This development has disrupted the vacation travel plans of many people in the United States, in turn denting airline passenger revenues.

Key topics governing the airline industry

Omicron-Variant Spread Stings Airlines: Agreed that Airspace had a much better run in 2021 than the coronavirus-ravaged scenario in 2020. However, airlines seem on the back foot again with a large number of flight cancellations in recent weeks. Omicron-induced personnel crisis and weather woes prompted US carriers to cancel several flights, upsetting the travel plans of many passengers. Some carriers even pared their schedule for the current month.

Even though the fourth quarter 2021 earnings season is in its nascent stage, airline players already released their figures, provided a disappointing outlook for the March quarter, particularly on the revenue front, due to the omicron driven crisis.

5G Rollout fears Added misfortune: Compared to Reuters, CEOs of major US airlines warned of catastrophic aviation crisis in the event of 5G “C-Band” services being rolled out by telecom companies. Some carriers have warned that many flights could be affected if 5G signals cause interference with altitude-limited instruments under certain weather conditions. Airlines are primarily concerned about 5G rollOut causing poor readings by altimeters (devices that use radio frequencies to measure the distance between the plane and the ground, and help planes land in bad weather). Even though airlines breathed a sigh of relief with the 5G rollout at major airports being temporarily delayed, the overhang will remain unless a permanent solution to the problem is found.

Oil Price May Rise in 2022 Hurting Bottom Line: The US Energy Information Administration (EIA) in January 2022, increased its oil price forecast. The EIA in its current month short-term energy outlook said it expects the average spot price to be $74.95 per barrel for the year. This represents an increase from its December forecast in which it forecast the average Brent spot price at $70.05 per barrel for 2022. It even projects an average of $78.63 per barrel during the first quarter of 2022. This estimate is $5.63 per barrel higher than its previous prediction.

The EIA’s forecast hike for oil prices is a headwind for airlines and could dent bottom-line growth. Indeed, fuel expenses represent one of the higher entry costs for these players.

Zacks Industry Rank Indicates a Bearish Outlook

The Zacks Airline Industry is a group of 28 titles within the broader Zacks Airline Industry. He currently carries Zacks Industry #247 Rank, which he places in the bottom 3% of over 250 Zacks industries.

Zacks Industry Group Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dim short-term outlook. Our research shows that the top 50% of industries ranked Zacks outperform the bottom 50% by a factor of more than 2 to 1.

Before discussing a few industry stocks, it is worth taking a look at shareholder returns and its current industry valuation.

Industrials sector and poor S&P 500 performance

Mainly 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% in the period against the 14.4% rise in the S&P 500 index. The broader Zacks transportation sector rose 3.7% in the same period.

One Year Performance Award

Current industry assessment

The price-to-sales (P/S) ratio is often used for the valuation of airline stocks. The industry currently has a 12-month lead P/S of 0.55X against the S&P 500’s 4.46X. It’s also below the sector’s forward-12-month P/S of 1.95X.

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

Prior 12 Months Price to Sales Ratio (Last Five Years)

3 Airplane Stocks To Keep An Eye On

Azul: This Brazilian carrier currently carries a Zacks Rank #2 (Buy). The carrier is benefiting from improved air travel demand in the South American nation. Obviously, domestic traffic in Azul December increased by 20.9% compared to the reported figure (pre-coronavirus levels) of December 2019.

In addition, strong growth in e-commerce is boosting revenue at the Azul 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, mainly driven by upbeat demand for Azul’s logistics solutions. freight are likely to have been strong in the fourth quarter as well.

Shares of the carrier have rallied 10% over the past month. The Zacks consensus estimate for fourth-quarter 2021 net income stands at a loss of 57 cents, after cutting from a loss of 90 cents 90 days ago.

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

Price and Consensus: Azul

Gol Linhas Intelligent Areas: This Brazilian carrier currently carries a Zacks Rank of 3. Like Azul, Gol is also benefiting from improved air travel demand in the country. That expects airlines 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 grow by 13.2%.

Gol Linhas forecasts 2022 total net revenues to exceed pre-pandemic (2019) levels. The Zacks consensus estimate for the fourth quarter 2021 bottom line is down to 51 cents from 53 cents 60 days ago.

Price and consensus: GOL

Copa Holdings: This Panama City-based carrier, currently wears a Zacks #3 Rank (Hold). Courtesy of Increased Vaccines, Carrier is improving circulation in their air witnesses. We are also encouraged by the airline’s initiatives to modernize its fleet. Apart from adding aircraft, this carrier is replacing outdated 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. The Zacks consensus estimate for fourth-quarter 2021 net income rose to $1.05 from 37 cents 90 days ago.

Pricing and Consensus: CPA

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