Airlines Had a Good July
The airline industry has had a mixed revenue performance in 2013. Consolidation has led to lower supply, but sluggish demand caused by fiscal tightening has offset this factor. Despite the sometimes challenging revenue environment, most airlines posted good profit growth in the first half of 2013. Accordingly, airline stocks have performed very well this year.
Investors' confidence was rewarded last month, as airlines posted healthy unit revenue growth across the board. Clearly, summer travel demand has remained strong. The next "proof point" for the airline industry will come with the seasonal decline in demand after Labor Day. If airlines can continue to drive healthy unit revenue gains during a seasonally weak period, airline stocks will have even more upside.
Unit revenues take off
For most of 2013 there have been clear "leaders" and "laggards" each month, as some airlines have fared better than others from a unit revenue perspective. By contrast, in July, the five-largest U.S. carriers turned in very similar unit revenue performances:
Unit Revenue Change
Delta Air Lines
Each of the major airlines reported a unit revenue increase of 3%-5%. Delta has the highest exposure to the weak Japanese yen, which depressed its unit revenue by 1%; otherwise the range of results would have been even smaller.
US Airways had a particularly impressive July. Generally, increasing capacity has a negative effect on unit revenue. For example, in April, the airlines that added the most capacity turned in the worst performance, while United -- which reduced its capacity -- posted the best results in the industry.
By contrast, US Airways managed to achieve the highest unit revenue growth among the major carriers for July, despite growing capacity the most. This showcases the strength of travel demand this summer. Despite having more seats for sale, US Airways was able to increase its load factor (the percentage of seats filled) while also charging higher prices.
Will demand hold up?
August air travel demand tends to be similar to July demand, so we should expect another strong performance this month. The big question for airline investors is whether unit revenues will continue improving this fall, since air travel demand typically drops off after Labor Day.
To keep unit revenue moving in the right direction, airlines may need to trim some capacity in the fall. Delta has already begun to reduce its capacity in the Japanese market, as the weakness of the yen has undermined its profitability there. Southwest has also reversed plans to increase capacity, and plans no further capacity growth until 2015 at the earliest.
However, American and US Airways are still trying to grow, and United -- which has been cutting capacity for most of 2013 -- expects to return to capacity growth this fall. These airlines may want to reconsider their growth plans as they manage the transition to the weaker fall season.
If the industry can stay on course this fall, investors can be more comfortable with the sustainability of industry profitability. On the other hand, if airlines hit any major bumps, airline stocks may give up some of their impressive gains.
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The article Airlines Had a Good July originally appeared on Fool.com.Adam Levine-Weinberg is short shares of United Continental Holdings and is long September 2013 $33 puts on United Continental Holdings . The Motley Fool recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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