Are Airlines Finally Rectifying Their Mistakes?

Many airline stocks have sold off in the recent past due to the concerns surrounding the declining unit revenue.  Due to cheaper oil, airlines have been competing extensively on price. As a result, unit revenue across the entire sector has plunged considerably this year. Moreover, due to the competition, air fares have also declined and this has negatively affected the share price of various aviation stocks.

However, it looks like air fares are finally stabilizing. After three months of successive decline, air fares finally ticked up over the last two months. According to the Bureau of Labor Statistics, air fares jumped 1.2% M/M in November.
This was the second consecutive month of price increase and it finally looks like prices are stabilizing. Even though many carriers have been conservative with their unit revenue guidance, I think the stocks will move higher given the recent increase in ticket prices.

Aviation sector is also expected to post a record profit in 2016, and I think investors can benefit from this trend by picking the right stocks. My favorite picks from the aviation sector would be JetBlue (JBLU) and Spirit Airlines (SAVE).

JetBlue’s stock took a plunge recently after the company shared cautious unit revenue guidance for the upcoming quarter. The slashed guidance led to a 7% decline in JetBlue’s share price and I think long-term investors could use this dip to buy the stock.

JetBlue’s unit revenue metric has outperformed the entire industry in 2015 and with several revenue-driving initiatives expected to start in 2016, investors can expect the stock to continue moving higher in the coming months.

As for Spirit, the company’s stock has fallen as much as 40% this year on account of weak unit revenue. However, I think the sell off was overdone and the stock will recover heading into 2016. Being a ULCC, the price war had a big negative impact on the company’s PRASM. In fact, the carrier’s performance was the worst as its unit revenue dipped by 17.5% in 2015.

However, with ticket prices finally moving higher, Spirit’s PRASM should move higher. In fact, I think the company is already heading in the correct direction as Spirit’s CEO recently said that the company expects better-than-expected unit revenue for the fourth quarter.


With oil prices hovering near multi-year lows, I think Spirit and JetBlue are perfectly placed to benefit from a strengthening air fare environment. Both the stocks are currently trading at a very cheap valuation, and given their prospects, I think they possess huge upside potential. Hence, I think investors should buy these two airlines stocks going forward.
Published on Dec 18, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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