The Key Variables Impacting Airline Stocks

The financial performance of global airlines improved significantly in 1Q15. Profitability both at the operating and net levels improved, mostly coming from the North American airlines. Decreasing jet fuel prices and cost-cutting measures are two major reasons for this strong performance.

A strengthening dollar has meant improved profitability for US airlines while subduing profitability for non-US airlines. This further increased the industry’s performance gap across the globe.

Despite improving profitability and with the exception of Alaska Airlines (ALK), all major US airline stocks fell last month. American Airlines (AAL) was the biggest loser, falling 12%. Southwest (LUV) and United Airlines (UAL) following closely, falling ~8.5% each. JetBlue Airways (JBLU) fell about 2%, while Alaska rose ~1%.

As a result, the iShares Transportation ETF (IYT), which holds 38% in airline stocks, also fell by ~3%. Much of this fall is attributed to the concerns of airlines adding capacity in excess of demand due to an improving economy, a strengthening dollar, and increasing oil prices.

The NYSE Arca Airline Index fell almost 12% YTD against the S&P 500 Index rising 1.62%. This airline index fell almost 6% in May, while the S&P 500 rose ~1% during the same period.

Airline stocks are impacted by numerous factors, including:

• key demand drivers like US economic growth, jobs data, disposable income, and corporate profits
• actual demand as measured by airline traffic
• supply measured by airline capacity
• capacity utilization measured by load factor
• fuel cost
• airfares

In this series, we will take a look at the importance of each of these airline indicators. These indicators should help you get a sense of where airline stocks are headed. Most of these indicators are released monthly, while others are released quarterly.