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Analyzing Airline Stocks’ First-Quarter Margins

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Major airlines’ margins

Airline companies’ latest earnings releases show mixed profitability—some pretax margins have improved YoY (year-over-year), while others have contracted. Delta Air Lines’ (DAL) pretax margin expanded by 150 basis points to 7.9%, mainly due to lower costs and oil prices. Its ex-fuel costs per available seat mile (or CASM) fell 0.2% due to its cost control, fleet transformation, and Delta One initiatives. United Airlines’ (UAL) pretax margin improved by 210 basis points to 4.1% due to its ex-fuel CASM falling 1.8% and its average aircraft fuel price per gallon falling 2.8%.

Meanwhile, Southwest Airlines’ (LUV) and American Airlines’ (AAL) pretax margins narrowed by 170 and 150 basis points, respectively. The companies stated that sluggish revenue growth and increased expenses due to flight cancelations hurt their bottom lines.

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Profitability enhancement measures

Over the last several quarters, US air carriers have taken several steps to improve their profitability. These companies have been heavily investing in technology to reduce unnecessary workforce expenses and provide enhanced services to customers.

Airlines have also resorted to route realignment strategies to focus on their most profitable routes, and some are enhancing their premium seating capacity to lure corporate and premium clients and higher fares.

Additionally, many US air carriers are now focusing on non-ticket items such as charges for checked baggage, preferred seat assignments, early boarding, large carry-ons, and refreshments to boost their revenue and margins. To gain exposure to the US airline industry, you could invest in the iShares Transportation Average ETF (IYT). The ETF, which has allocated 17.5% of its portfolio to the industry, has gained ~19% this year.

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