The airline industry’s fundamentals have improved tremendously in the past two years. This was driven by several factors that include low oil prices, strong passenger travel demand, and strong economic growth.
Profitability is also at its peak. In its recent report, Moody’s Investors Service noted that it expects global airline industry profits to remain strong amid lower fuel prices in 2016. Also, Credit Suisse expects 2016 to be the seventh consecutive year of industry profitability, marking the longest positive cycle in US airline history. The industry’s returns on capital are expected to exceed its costs, indicating that the industry is moving toward financial sustainability.
However, capacity additions beyond demand growth, a strong US dollar, growing unrest among employees, and lower fuel surcharges could hamper yields for airlines. Despite low oil prices, airlines could struggle to keep their costs low.
Airlines are a cyclical industry. Key indicators suggest that now is the time to be cautious with airline investments.
The earnings season has just begun. Delta Air Lines (DAL), United Continental Holdings (UAL), Alaska Air Group (ALK), and Southwest Airlines (LUV) have already declared their 4Q15 earnings. The expected earnings dates for other major airlines are as follows:
- Allegiant Travel (ALGT): January 27, 2016
- JetBlue (JBLU): January 28, 2016
- American Airlines (AAL): January 29, 2016
- Spirit Airlines (SAVE): February 9, 2016
We will be covering all of these, so be sure to visit the Market Realist Airlines page. Investors can gain exposure to the airline industry through the PowerShares Dynamic Leisure & Entertainment Portfolio ETF (PEJ), which invests ~27% of its portfolio in airline stocks.