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Budget airlines face headwinds in this week's earnings

Trevir Nath, director of content
Toby Melville | Reuters

Consumers appetite for travel is reaching new heights after years of waning demand. This earnings season has already highlighted gains from traditional airliners like United Continental, Delta Air Lines and American Airlines.

All three major airlines topped earnings expectations this past week on improving travel trends and lower fuel costs. In separate announcements, each company reported booming passenger traffic for September, which will be reflected during in the fourth quarter. One key metric — total revenue per available seat mile metrics, or TRASM — remains a source of concern that will continue to drag on future reports though.

The remaining airlines are scheduled to report earnings this week with expectations trending higher following last week's reports. They include Spirit Airlines and JetBlue Airways on Tuesday morning and Southwest Airlines on Wednesday.

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Combined they represent a subset of the industry best known as budget airlines that has attracted customers with no frills and lower price points. Today's economic conditions favor value channels, which is why these airlines have thrived compared to larger competitors.

Year-to-date stock performance

Spirit Airlines

Spirit is the smallest of the three discounters, but has shown that it has the most upside. In the second quarter, the airline topped expectations and delivered mid-single-digit growth on both the top and bottom line. A majority of these gains were credited to a 11.5 percent decrease in fuel expenses driven by a 29 percent drop in the average fuel cost per gallon. Favorable fuel costs are expected to aide margin growth in Tuesday's report but should have no impact on the top line.

Spirit's key TRASM metric is forecasted to decline by 7 percent, a slight improvement from earlier projections calling for a 9 percent decline. Consistent efforts to expand and modernize its fleet are encouraging signs that the carrier is heading toward rectifying stunted revenue growth.

Analysts are calling for earnings per share of $1.12 on $612.29 million in revenue, according to the Estimize consensus data. That represents a 17 percent decline on the bottom line and 6 percent increase on the top from a year earlier. Shares are now up 18 percent in 2016 and in the past 12 months.

Jetblue Airways

JetBlue is in a similar position, in which a recent string of strong results has been powered by depressed fuel costs. This theme will be evident for future quarters and should provide a much needed boost to the bottom line. Top line growth this quarter is expected to receive a boost from the summer travel season that ended in September. That said, PRASM measures will still be a sore spot in tomorrow's report. The carrier is guiding for a 3 to 4 percent decline during the third quarter, a significant improvement from the 10.5 percent record in the second quarter.

Analysts surveyed at Estimize are looking for earnings per share of 61 cents, 4 percent higher than the same period last year. That estimate has increased 11 percent since JetBlue's most recent report in July. Revenue for the period is anticipated to grow by 2 percent to $1.72 billion, right in line with the second quarter. Despite making modest quarterly gains, shares have been hammered this year. The stock is down 18 percent this year and historically remains flat immediately through the print.

Southwest Airlines

Southwest is the last and the largest of the budget airlines reporting this week. The carrier is generating significant returns driven by key business investments and low fuel prices. In the second quarter, the bottom line grew by 16 percent while sales jumped 5 percent. Strong demand for lower-fare flights throughout the quarter contributed to positive operating unit revenue growth, despite a competitive environment. PRASM, on the other hand, dropped 3.5 percent with management guiding for similar declines for the third quarter.

Analysts expectations have edged down just ahead of its quarterly report. The Estimize consensus is calling for earnings per share of 89 cents, reflecting a 4 percent decline from a year earlier. That estimate has dropped 12 percent since the company's most recent report in July. Revenue for the period is expected to remain flat at $5.14 billion, marking a continued slowdown from previous quarters.

In a recent announcement, Southwest Airlines reported a 7.7 percent increase in passenger traffic and 6 percent increase in capacity for the month of September. Shares have since jumped by 14 percent, nearly erasing its yearlong declines.

Many of the airlines are starting to take flight after years of sliding unit revenue, but none more than the discounters. Improving traffic trends in the month of September along with strong quarterly results are making progress towards reversing a yearlong plunge that has concerned investors. Along with steadily declining fuel costs and plans to begins flights to Havana, investors have every reason to be optimistic.

How do you think these names will report? Be included in the Estimize consensus by contributing your estimates here.