The global airline industry is trading at cheap valuations relative to the broader market and could take off as carriers increase efficiency to lower costs and more people around the globe travel abroad.
On the recent webcast, Why Airline stocks May Still Have Room to Fly: It’s Not Just About Oil, Helane Becker, managing director for Cowen and Company, pointed out that the U.S. airline industry remains strong and is growing as the economy continues to expand. Specifically, for every 1 point gain in the U.S. gross domestic product, airline traffic growth rises about a 1.5 points. [Exploring ETF Opportunity in the Friendly Skies]
For international, or non-U.S. airlines, the U.S.-dollar-denominated costs are a major concern as it makes up 30% to 40% of costs. Consequently, more overseas airlines are adding capacity to the U.S.
The industry is also enjoying lower costs as oil prices have dropped significantly over the past year. International airliners, though, are not seeing the same level of savings as U.S. airlines, since jet fuel is dollar denominated.
“Margins are up versus a year ago primarily because oil prices are down 40%,” Becker said. “So that has a positive effect on margins.”
However, there are some other cost considerations. For instance, regulatory changes and pilot rules are causing a pilot shortage, which may raise labor costs.