Despite Global Headwinds, Q2 Airline Earnings Are Looking Good

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August 26, 2016 10:06am NYSE:JETS

Domestic airlines seemed to shrug off political uncertainty both here and abroad and the threat of global terrorism, if second quarter earnings are any indication. The four biggest U.S. carriers—American Airlines, Delta Air Lines, United Airlines and Southwest Airlines—collectively recorded a net profit of $3.9 billion.

Early in the quarter, Alaska Airlines announced that it would be acquiring Virgin America in a $2.6 billion deal that will turn Alaska into the fifth-largest U.S. airline by traffic. The merger is expected to help Alaska become the number one player on the West Coast. Annual revenue could grow 23 percent because of the deal, according to the Wall Street Journal.

As for earnings, American reported net profit of $950 million, a decrease of 44 percent, as it put aside cash to deal with income taxes. Revenues also fell 4.3 percent to $10.36 billion, on intensifying domestic and foreign competition. Earnings per share (EPS) were $1.68, compared to $2.41 a year ago. The Fort Worth-based carrier announced last month that it would renew its credit card deals with Citigroup and Barclays, a move that’s estimated to add $1.55 billion to its pretax income over the next three years. During the second quarter, American returned $1.7 billion to shareholders in dividends and stock buybacks.

Delta beat Wall Street expectations, reporting net income of $1.5 billion, or $2.03 per share, a 4.1 percent increase. The carrier announced recently that it was cutting its fourth-quarter capacity growth in half, from 2 percent to 1 percent, mostly as a result of the steep drop in the British pound following Brexit, the British referendum to leave the European Union.

Chicago-based United Airlines reported net profit of $588 million, down 50.7 percent from the $1.19 billion in the same quarter last year. Losses were driven by the strong U.S. dollar, lower surcharges, travel reductions and demand not keeping up with capacity, according to United. The carrier repurchased $694 million worth of company stock during the quarter, with an additional $2 billion authorized by the board.

Southwest’s quarterly profit climbed 35 percent to a record $820 million, or $1.28 per share, from last year’s $608 million. Even so, these results fell short of expectations. The airline pointed the finger at fierce fare competition resulting from low oil prices. According to JPMorgan, Southwest “faces larger labor hurdles than any other U.S. operator,” with “$550 million of incremental wage pressure in 2017.”

Performance Drivers

Low crude oil prices continue to be a significant profit driver for airlines. With jet kerosene expected to average $55.4 per barrel, down from last year’s average of $66.7, fuel now accounts for a much lower percentage of airlines’ total expenses: 19.7 percent, compared to 27.5 percent in 2015.

On a global scale, airlines’ load factor, a measure of the use of airline capacity, climbed to 83.4 percent in April, after three straight months of declines, according to new data from the Department of Transportation.

Meanwhile, the number of revenue passenger miles (RPM) in April rose to 77 billion, an all-time high.

Based on calculations updated in June, the International Air Transport Association (IATA) expects net profits for global airlines to reach $39.4 billion by year’s end, with profit per departing passenger to hit $10.40, up from $9.90 in 2015.

North America remains the most profitable region, expected to earn $22.9 billion, following by Asia-Pacific ($7.8 billion) and Europe ($7.5 billion).

Consider the JETS ETF

Investors seeking exposure to the airline sector should consider the U.S. Global Jets ETF (NYSE:JETS). JETS has lost about 10% of its value since the start of 2016, but could be poised for a comeback with fuel prices low and many airline earnings starting to beat expectations.

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