The Air Transportation Market is Growing. Where to Invest?

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

Today, practically every person who has internet access knows what Amazon and Alibaba are. These are the world’s largest internet-companies who, for the sale of their products, also use famous platforms like AliExpress and eBay.

Their total revenue constantly has been increasing year after year.

And as long as these companies are oriented toward international markets, 95% of the goods they sell are delivered by air.

Here we could pay attention to the aircraft manufacturers, as the air transportation growth rate will lead to increased demand for new aircraft. Boeing has conducted research according to which the demand for pilots, aircraft technicians and flight attendants in the world is growing, and the biggest activity is expected in the Asia-Pacific Region and in North America.

This week, the news feeds have been peppered with headlines on the current shortage of pilots in airline companies, and this demand will be hard to satisfy in the nearest 10 years.

Last week, Ryanair pilots went on strike demanding a salary raise and improved improved working conditions.

Consequently, investors have started showing interest in airline companies. Also, rumor has it that Warren Buffett is going to invest in one such company (or in several), but it has not yet been indicated which one exactly. According to some reports, it may be Southwest Airlines Co. (NYSE: LUV).

Southwest Airlines Co. is an American low-cost airline founded in 1971. It is the biggest low-cost carrier in the United States and in the world by the number of transported passengers. As of December 2017, there were 706 Boeing 737 aircraft in the company. By its financial performance, the company looks attractive for long-term investments. For example, profitability has reached 16.90%. The Short Float ratio is very low – only 1.82% and the debt to equity ratio is 0.48.

Based only on the rumors, Southwest Airlines stocks have left the consolidation range between the levels of $50.00 and $53.50, having broken out the 200-day moving average and indicating a possible formation of an ascending trend on D1. The closest resistance levels are at $62 and $67.

On W1, a stable uptrend is visible and the broken out levels are becoming a support for underlying price.

It is unclear precisely which company Warren Buffett will direct his attention to, so we can analyze the financial standing of other airline companies, which can become potentially interesting investments.

Delta Air Lines (NYSE: DAL) is one of the largest airlines in the world. Its destinations network includes countries in Asia, Europe, North, South America and the Caribbean region. As of January 2018, Delta Air Lines had 853 aircraft.

The financial performance of this company over the last 4 years shows a drop in income.

Profitability is 7.7%, the debt to equity ratio is 0.67 and the Short Float ratio is 2.65%.

According to technical analysis, the price is trading near the 200-day moving average, constantly breaking it out in both ways. Since December 2017 the resistance has formed on the chart, as the stock still won’t break out. In this situation, the breakout of $57.00 can be a signal for the further growth of the price of the stocks, but, at the same time, it has to be confirmed by good Q3 results.

On W1, there is still an uptrend, but we can already see a more serious resistance area from 2015 in the range between $53 and 56. The price is now in this range. The stock already tried to break out of this resistance in January 2018, but is has never managed to secure its position above this resistance. Here there is a high chance of the price falling to the support at $40. Currently, the potential drop of the price of the stock prevails over the growth.

The next airline company which we can direct our attention to is American Airlines, Inc. It is also one of the largest airline carriers in the world with headquarters in Fort Worth (Texas). The aircraft fleet of the company amounts to 958 aircraft in total.

Unfortunately, recently the financial performance of this airline has not been perfect either.

The debt to equity ratio (25.16) clearly demonstrates how risky this asset may be. That means that the company has 25 times more debts than the means to clear these debts. In this situation, the slightest decline of aviation operations may seriously hurt the company.

It should be noted that American Airlines has the “youngest” aircraft fleet now, as the company has invested its money exactly in the aircraft, which has caused such debts. Therefore, the company decided to risk, bu investors have not appreciated it, and thus the price of the stocks in 2018 was constantly falling.

Currently, the stock is in a downtrend. The price is gradually dropping within the descending channel, breaking out the support levels. However, near the level of $36 there has appeared a surge in rise, which indicates a possible forming of a strong support.

This can be due to rumors about Buffett’s interest towards the airline companies: his fund has now about $100 billion of available cash and a part of it will get to the market. Overall, the stocks of American Airlines seem to be a very risky investment.

There is another large airline company, which may be interesting from the point of view of investments: United Continental Holdings.

United Continental Holdings (NYSE: UAL) is the fourth largest airline company in the United States. It appeared out of the merger of United Airlines and Continental Airlines in 2010. As of June 2018, the aircraft fleet of United Continental Holdings amounts to 716 aircraft. Also, as in the two previously described airline companies, the most successful financial year was 2015. According to those results, profits reached $7.34 billion.

The Short Float ratio is 5.20%; the debt of the airline is 1.62 times bigger than its internal funds.

On D1, the technical analysis indicates an uptrend, as the price is now above the 200-day moving average and has secured its position above $80. In this situation, the further growth of the price cannot be excluded.

On W1, the stock also shows a stable uptrend trend and is currently trading near its historical maximums.

Thus, the technical analysis indicates a good growth potential for this stock, but the possibility of the correction of the price to $75 cannot be excluded either.

Having summarized the data on the revenue, we can see the big picture in the airline transportation market for 4 airlines.

American Airlines has lost the most income, while Southwest Airlines has been constantly increasing its profit.

The rest of the data indicates that the riskiest assets is American Airlines – its debt is the biggest out of all the 4 companies, its profitability is low and its Short Float is high.

To sum up, for the nearest years Southwest Airlines looks the most attractive investment-wise.

Amid all these data, Southwest Airlines noticeably stands out – all the rest have not been able to restore the previous revenue level after 2015. The fact of the matter is that Southwest Airlines has concentrated on low-cost transportation and this decision turned out to be the right one. If Buffett’s fund does buy Southwest stocks, this may become a very good investment for the coming years. Nevertheless, even without it, the expected growth of the passenger throughput will only be increasing the profit of this company and, consequently, the price of its stocks.

You should not consider this article as a guideline to follow in any way – this is only information for analysis.

 

Disclaimer

Any forecasts contained herein are based on the authors’ particular opinion. This analysis may not be treated as trading advice. RoboMarkets bears no responsibility for trading results based on trading recommendations and reviews contained herein.

Having majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.