Here's Why You Need to Start Reinvesting in Airline Stocks

The airline industry's biggest trade group is forecasting the busiest air travel period in history over the Thanksgiving holiday with some 27.3 million passengers expected to jump on board, a 2.5% leap from last year. Does that make it a buying opportunity for airline stocks?

Maybe, considering what a boon that will be for the airlines, which have slapped a whopping 42% premium on tickets during the 12-day period, according to Hopper.com, the airline-ticket research group.

What's more, the longer you wait to buy a ticket to travel over Thanksgiving with the other 2.27 million passengers that the Airlines for America trade group estimated will be taking to the skies each day during that period, the price will climb. Tack on an extra $4, on average, to the ticket price for each day you delay, said FareCompare.com CEO Rick Seaney.

"That's the bad news," he said. "The good news is, as high as Thanksgiving prices are, they're not as bad as they have been."

Indeed, overall prices in November are projected to be 2.7% higher than they were last month, but down about 1% from last year and off 14% from two years ago, Hopper said. And for December, Hopper is forecasting a 2.3% pullback from November to $215 before bottoming out at $211 in January, 1.8% lower than December. Then ticket costs start to climb again as spring travel begins.

Prices have been dropping precipitously as airlines have put more seats in the air than there are passengers to fill them. That's been a welcome relief to consumers but a headache to the industry's largest legacy players, which have seen the PRASM measure fall for 18 straight months.

PRASM, or passenger revenue per available seat mile, is a key measure of airline profitability that divides all the passenger-related operating revenue, which includes ticket prices, baggage fees, costs for extra legroom or an aisle seat, and the like, by the total available passenger seat miles. The higher the PRASM, the better the profitability of the airline. When it falls, it underscores the level of competition, and price hacking, in the industry. (It's similar to RASM, revenue per available seat mile, which includes other revenue-generators such as freight and charter flights).

This may seem counter-intuitive, but cheaper fuel costs tend to be the culprit behind lower PRASM. Why? Because when fuel prices -- next to labor, the biggest operating costs for the industry -- tumble, routes that weren't ringing up much in revenue suddenly look like goldmines. That prompts carriers to raise capacity, which leads to the imbalance in supply and demand.

Though the airline industry is still wildly profitable, that pesky PRASM dip tends to rattle investors, who fear the industry may be headed to the dark days of the recession and pre-bundling when profitability was hard to come by. Guess what happens then? Yep, share prices fall.

And they did, with many hitting 52-week lows in late June, post second-quarter results. They are starting to slowly recover, but their price-to-earnings multiples are still in single digits for many. And they're trading at levels that are still well below the year-ago altitudes, such as Alaska Air (ALK) and JetBlue (JBLU) , and in some cases below or at levels from two years ago, like American Airlines  (AAL) , Delta Air Lines (DAL) , United Continental (UAL) and Southwest Airlines (LUV) .

While many carriers predicted and probably prayed that the PRASM declines would end by the third quarter, we found out when results were released last month that positive PRASM or RASM wasn't happening just yet. But, as Delta CEO Ed Bastian said on his conference call, "The challenge is to get RASM back positive, and we're optimistic that's exactly what we'll be doing."

Most carriers projected better PRASM and RASM numbers by the first quarter to the middle of next year. Plus, a number of them said they will either pull capacity out or limit expansion in coming quarters. "We need to be more conservative with our growth," Southwest CEO Gary Kelly said on his conference call.

Are we there yet? Should we turn attention back the airline industry? "It's time," said JPMorgan airline analysts Jamie Baker and Nishant Mani. In a recent report to clients, the team said it sees better numbers ahead coupled with fare increases that are sticking, such as the tiny $5 one Southwest introduced Oct. 25 on domestic flights that other carriers followed.

"After suggesting last summer that investors enjoy a break until the turn in RASM became more apparent, we believe said turning point is upon us," the analysts said. They raised their rating on Southwest to outperform after the price hike. "Capacity trends continue to tighten, close-in yield progress is apparent, and positive RASM in (the second half of 2017) may help unlock stubborn multiples."

They described the Southwest fare increase as "some welcomed revenue vigor from the nation's largest discounter. All told, sector risk/reward looks considerably better to us than last July, even considering the modest appreciation that occurred during the earnings season." With "flattish" unit-revenue industry trends expected in the first quarter and positive in the second, the two forecast industry consolidated revenue will rise 3.7% next year, "the first increase since 2014."

Cowen and Co. analyst Helane Becker expects the unit-revenue tables will turn positive as well, and looks forward to upcoming investor days that airlines hold for more information. "The airlines continue to talk about improving unit revenue," she said. "With capacity growth expected to slow in next year, and with generally improving walk-up fares, we expect unit revenue to turn positive by mid-2017."

So, yes, it's time if you believe Baker, Mani and Becker. Zack's Research has a slightly different take: Rising labor costs (workers want a piece of that profitability too you know) and other operating outlays will take a bigger chunk out of income in 2017. But, it noted, falling oil prices may help offset that for the time being. "Oil prices are unlikely to touch the highs (in the $100 range) of mid-2014 anytime soon," Zack's said. "This factor will continue to aid these carriers' bottom line, going forward."

One thing's for certain, you can enjoy this spate of competitive ticket pricing in the industry for a bit longer -- even if you don't invest in the stocks. Pack your bags.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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