American Airlines (AAL +5%) is leading airline stocks higher after a slew of earnings reports from the industry this morning. American was the last of the big-three airlines to report fourth quarter results. Delta (DAL +0.4%), United (UAL +2%) and now American all gave a bullish viewpoint of 2019 over the last week.
The group came under pressure after both Delta and American lowered fourth quarter unit revenue guidance in early January, citing weakness in the back half of December. That sparked concern that lower oil prices (fuel expense) would increase competition and put pressure on fares.
All three have since guided for low-single digit unit revenue growth in the first quarter. While that does mark something of a slowdown, growth in the first quarter is being impacted by the shift of Easter into the second quarter and less so by the government shutdown. Weakness in Europe is affecting demand for trans-Atlantic flights, but the domestic market remains strong for the leisure and corporate segments.
The big three airlines remain upbeat on 2019.
Delta’s stock didn’t react favorably despite upbeat commentary from management regarding 2019. Delta reaffirmed its EPS outlook.
United's stock traded higher in response to strong fourth quarter results as unit revenue outperformed with 5% growth.
This morning, American called for 40% earnings growth this year. Management expects to outperform peers in terms of 2019 unit revenue as it grows its basic economy offerings and expands in Dallas and Charlotte. Investors have reason to take the EPS guidance with a grain of salt. Management admitted that there are a number of variables at play when it comes to the bottom line, hence the wide range of $5.50-7.50/share. One year ago, American guided for EPS of $5.60-6.50, but the company reported $4.55 this morning.
The number four US airline Southwest (LUV +5%) also reported strong fourth quarter results and called for a strong 2019 this morning.
Smaller carrier Jet Blue (JBLU +5%) was yet another carrier to call for a solid year and reaffirmed its 2020 earnings target.
Sentiment on airline stocks remains quite poor, reflected in their cheap valuations. The group was considered un-investable for decades until consolidation coming out of the financial crisis gave the group pricing power.
The industry is experiencing somewhat of a renaissance in terms of financial performance over recent years. Still, the carriers don't get a ton of credit as the group still has a history of disappointing investors.
The airlines trade at just 5x EV/EBITDA on average, while Southwest with its differentiated business model trades at a premium of 6x EV/EBITDA.