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How Did Airline Stocks Fare during Q3 Earnings Season?

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Airline stocks rose last week. Most of the companies reported better-than-expected third-quarter results. Among the major US carriers, Southwest Airlines (LUV), American Airlines (AAL), JetBlue Airways (JBLU), and Alaska Air (ALK) reported their third-quarter earnings results last week. Their third-quarter earnings beat analysts’ expectations and increased significantly YoY (year-over-year).

Southwest’s third-quarter EPS of $1.23 beat analysts’ estimate of $1.08 and rose 13.9% YoY. American’s third-quarter EPS increased 20% YoY to $1.42 and beat analysts’ expectations by a few cents. JetBlue’s adjusted third-quarter EPS of $0.59 beat analysts’ estimate of $0.51 and rose 40%. Alaska Air’s third-quarter adjusted EPS improved 38% YoY to $2.63 and beat analysts’ expectations of $2.52.

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Last week’s reports reflect impressive quarterly results that started with Delta Air Lines (DAL) on October 10. The company’s adjusted EPS grew 33% YoY to $2.32 and beat analysts’ estimates of $2.26. On October 15, United Airlines (UAL) reported a 33% YoY jump in its third-quarter earnings. The company’s earnings reached $4.07 and beat the consensus estimates of $3.97.

The better-than-expected third-quarter bottom-line performance instilled investors’ confidence in airline stocks. Last week, airlines witnessed a sharp upswing in their respective share prices, mainly after the third-quarter earnings report. Southwest, American, JetBlue, Delta, United, and Alaska Air stocks rose 6.1%, 9.4%, 10.6%, 1.4%, 1.7%, and 7.1%, respectively, last week.

The iShares Transportation Average ETF (IYT), which invests in Dow Jones transportation stocks, gained 3.4% last week. IYT has allocated approximately 20% of its funds in the airline industry.

What drove airline stocks’ third-quarter earnings?

Healthy travel demand, higher fares, efficient cost management, and lower fuel costs drove airlines’ earnings higher in the third quarter. Except for Southwest Airlines, all three of the carriers mentioned above recorded strong passenger traffic growth during the third quarter. American, JetBlue, Delta, United, and Alaska reported a YoY increase of 4.9%, 4.2%, 1.9%, 5.6%, and 4.4%, respectively, in traffic.

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We also think that increased ticket fares drove airlines’ third-quarter earnings. According to JPMorgan Chase’s report on June 13, Southwest and American increased their ticket prices twice during the second quarter. During Alaska Air’s third-quarter results, it revealed a 3.2% YoY increase in its average fares. Due to increased ticket prices, Southwest and Alaska Air’s passenger yield grew 4.1% and 3.6%, respectively.

Lower fuel costs also helped airlines’ bottom-line results. Notably, crude oil rates remained more economical in the previous quarter compared to the prices in the third quarter of 2018. The average WTI crude price was $56 for the third quarter—approximately 19% lower than $69 in the third quarter of 2018.

Fuel accounts for nearly 25% of an airline’s overall operating expenses. Therefore, falling crude prices boost airlines’ bottom-line results. During the third quarter, Southwest, American, JetBlue, Delta, United, and Alaska Air recorded a YoY decrease of 8%, 11.1%, 11%, 11.5%, 12.9%, and 8.6% in their respective average fuel costs.

MAX grounding impacted a few airlines

A few top US carriers’ third-quarter performances were partially impacted by Boeing’s (BA) 737 MAX grounding. Notably, MAX aircraft have faced a global flying ban since mid-March following two deadly accidents within five months.

Southwest and American own 34 and 24 Boeing MAX aircraft, respectively. During the third quarter, Southwest faced over 15,000 flight cancelations due to the MAX grounding, while American Airlines faced 9,475 cancelations. The flight cancelations reduced Southwest and American’s third-quarter pre-tax income by $210 million and $140 million, respectively.

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