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What are we looking for?

Efforts by governments in Canada and worldwide to loosen pandemic travel restrictions for residents and international travellers have taken a hit this holiday season over concerns regarding Omicron, with the travel industry and its customers having to pivot amid new rules regarding COVID-19 testing, etc. This, combined with increases in inflation and rising gasoline costs, is a cause for concern as companies begin to recover.

Today we focus on airlines, which have experienced some of the worst impact to revenue as a result of the pandemic.

The screen

We limit our search to airline companies traded in the U.S. and Canada with a market capitalization of more than $6-billion, and apply two key metrics:

  • Passenger load factor (PLF) is used to measure the percentage of available seating capacity that has been filled with passengers. A higher load factor is desired because it indicates the airline has sold most of its available seats. The measure is essential to an airline’s success because it indicates to investors and management that the company can generate sales, cover expenses and remain profitable.
  • Revenue per available seat kilometre, or RASK, is used to determine how efficiently airlines generate revenue and is calculated by dividing operating income by available seat kilometres (ASK). Generally, the higher the RASK figure, the more profitable the airline is. ASK (an important piece of the RASK) is one of the most reviewed metrics in the airline industry. It represents the total flight capacity (number of seats, whether empty or filled) of an airline, in kilometres.

For comparison purposes, we have also included 2021 aggregated analyst estimates for each airline’s PLF, as a measure of its recovery prospects.

More about Refinitiv

Refinitiv, a London Stock Exchange Group business, is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges and scale intelligently.

What we found

U.S. and Canadian airline companies

CompanyTickerMkt. Cap. ($ Mil.)PLF (%)PLF Estim., Fisc. 2021 (%)"RASK, Last Fisc. Yr. (US$)""1Y Ttl. Rtn. (%)"Recent Price ($)*
Alaska Air Group Inc.ALK-N8,070.255.273.30.0512.850.30
American Airlines GroupAAL-Q14,193.864.175.70.0632.517.12
Delta Air Lines Inc.DAL-N30,214.054.663.40.060-9.436.87
Southwest AirlinesLUV-N30,679.652.478.80.046-10.640.48
United Airlines HoldingsUAL-Q17,305.560.272.90.060-10.741.74
Air CanadaAC-T7,639.861.662.70.057-18.721.21

PLF = passenger load factor; RASK = revenue per available seat kilometre. *Recent stock price is shown in local currency. Source: Refinitiv

The screen resulted in six airline companies. Here are a couple to highlight:

American Airlines Group Inc. is a holding company that operates through American Airlines Inc., Envoy Aviation Group Inc., PSA Airlines Inc. and Piedmont Airlines Inc. Its primary business activity is the operation of a network air carrier, providing scheduled air transportation for passengers and cargo.

The company reported the highest PLF and RASK on our list with 64.1 per cent and 6.3 US cents, respectively, for fiscal year-end 2020. The company’s focus during the pandemic to reduce fixed costs has set itself up well as the industry recovers and it expects these cost efficiencies to be the main contributor to revenue margins over the next few years.

American Airlines also plans to massively deleverage, expecting to offload US$15-billion in debt by 2025. However, investors should remain cautious as high fuel prices and other variable costs will hinder the company’s effort to return to prepandemic bottom-line figures.

Air Canada is the only domestic carrier that appeared in the screening results. The company’s stock took the largest hit compared with the others on the list, with a decline, on a total return basis, of 18.7 per cent over the past year. In addition, analysts expect Air Canada to recover the slowest of its peers, with only a slight increase to its PLF figure for fiscal 2021.

However, the airline – Canada’s largest – has set itself up well for the future, given it entered the pandemic with less leverage and more liquidity than any of its U.S. peers. In addition, Air Canada is an internationally focused carrier, with only 22 per cent of its flights used for domestic routes and 20 per cent for U.S. trans-border flights. The airline should begin to benefit from the continuing, long-term global effort to ease travel restrictions, notwithstanding Omicron.

Investors are advised to do their own research before trading in any of the securities shown.

Erik Foo, CFA, is a proposition sales specialist at Refinitiv, covering research and portfolio management sales.

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