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Airfares Gain Altitude, Airline Stocks Follow Suit

27 June 2014 in Trading Ideas

If you haven’t booked your summer trip to Hawaii yet, get ready for the realization that your airline tickets would’ve been significantly cheaper even a month ago.

Last week, the Bureau of Labor Statistics reported that airfares rose sharply in May – to the tune of a 5.8% jump from April that marked the biggest one-month increase since July 1999.1

Overall, airfares increased 4.7% between May 2013 and May 2014, which was the biggest year-over-year increase since November 2011.

Rising fuel costs, due in part to the spike in oil prices, has certainly been one cause of higher fares. As a CMC Markets report noted, the average airline profit is $6 per customer with profit margins around 1-2%. Fuelling an aircraft makes up about one-third of an airline’s total expense, so these thin profit margins make them very susceptible to oil-price jumps.2

 

However, capacity limitations have also contributed. CMC said international flight competition has been reduced by mergers and code share partnerships between the airlines, for example, with the American/US Airways merger while also code-sharing with British Airways. As a result, airlines have been able to increase airfares with less chance of losing seats to competitors, CMC said.

As one might assume, this development has also been a positive for airline stocks. The airline segment of the On The Road motif (where it comprises a 44.9% weighting) has gained 4.1% in the past month. Overall, the motif has increased 5.7% in the past month. The S&P 500 has risen 2.2% during that time. So far in 2014, On The Road has gained 24.4%; the S&P 500 has returned 7.5%.

Some analysts voiced caution in the wake of a sector selloff sparked by a profit warning earlier this month from German aircraft maker Lufthansa.

However, others saw the move lower as a buying opportunity. Cowen analysts Helane Becker and Conor Cunningham said quite bluntly in a report two weeks ago that “fast money is selling into this news despite the demand environment remaining very strong for the US carriers.”3

The two analysts pointed out that May traffic results were well ahead of expectations, and Delta, Southwest and American Airlines recently guided their results higher. “We believe there is potential for upward revisions to consensus expectations as the demand environment is quite strong.”

For investors in airline stocks, such a prediction may soothe worries that a historic jump in airfares will dampen demand anytime soon.

1TheTravelPro blog, “Airfares take huge jump in May,” June 18, 2014, http://www.travelpro.us/2014/06/airfares-take-huge-jump-in-may.html, (accessed June 25, 2014).

2Jasper Lawler, “Airline stocks; higher oil prices and increased competition,” June 25, 2014, http://www.cmcmarkets.co.uk/en/blog/2014/06/25/airline-stocks-higher-oil-prices-and-increased-competition.

3Ben Levisohn, “Weakness in Delta, American a Buying Opportunity: Cowen,” barrons.com, June 11, 2014.

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