Airline stocks and sector-related exchange traded funds caught a tailwind Wednesday after United Airlines (NYSE: UAL) and American Airlines (NasdaqGS: AAL) anticipate stronger pricing power and improved revenue trends.
On Wednesday, the U.S. Global Jets ETF (NYSEArca: JETS), the only dedicated airline industry ETF, gained 2.1% while UAL jumped 6.7% and AAL increased 3.0%. JETS includes a 12.4% tilt toward UAL and 12.0% AAL.
Airline stocks strengthened after American said revenue for every seat flown per mile in the fourth quarter will be up 5% to 6% year-over-year, or two points better than previously expected, due to higher average prices and more last-minute bookings, the Associated Press reports.
The carrier also projected Q4 adjusted pretax margin to come in at about 6.5% to 7.0%, compared to earlier projections of 4.5% to 6.5%, Investor’s Business Daily reports.
This follows United’s late-Tuesday statement that revenue per mile figure would match last year’s fourth quarter, an improvement over its previous forecasts for a decline of up to 2%.
Further bolstering the airline industry outlook, Bank of America upgraded American Airlines and reiterated its buy rating on Delta and United Continental after analysts argued tax reform will boost business travel, reports Thomas Franck for CNBC.
“We view tax reform as a significant positive for corporate spending (banks, media companies and even airlines have given $1,000 one-time bonuses to employees), and we believe this can drive a pickup in corporate travel pricing,” wrote BofA analyst Andrew Didora. “Since 2014, we estimate corporate pricing is down 14 percent. … This coupled with strong international fundamentals should create a solid backdrop for the legacy airlines that are more levered to corporate travel than domestic, leisure-oriented airlines.”
These airline carriers generate roughly two-thirds of revenue from business travel, and any recovery in corporate pricing as a result of tax reforms could disproportionately benefit those companies.
“In a scenario in which corporate prices returned to the same levels as four years ago, corporate revenues could grow 15 percent, driving a strong fundamental backdrop for the industry and an even better outlook,” Didora added.
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