Factors making airlines surge

With US airlines soaring to previously unseen highs, we review the factors most favoured by investors over the last 18 months.

• Companies best able to fill their planes have been the most rewarded by the market
• Globally, Deutsche Lufthansa scores the highest for load factor
• On the bearish side, having a large reliance on fuel prices has been avoided by investors

In one of the most surprising turnaround stories of the last few years, US airlines have managed turn a business that was awash in red ink into a profitable enterprise. Investors have been keen to reward the industry for this new productivity push, as 11 of the 12 major listed US domiciled companies have outperformed the wider market by a large margin over the last 18 months. While the recent trend has been somewhat echoed over the rest of the world, returns have still been healthy across the board

Today’s research reveals the strategies that have been rewarded by global airline investors over the last 18 months.

Cram them in and make them pay

Of the suite of 13 airline specific factors in the Markit Research library, no other factor has been as rewarded by investors as having a high load factor.

This factor gauges an airline’s ability to sell its seats by dividing revenue seat miles by available seat miles as reported by airlines in their supplementary filing. Of the 46 global airlines which provide load factor data, the 20% of firms with the best factor have outperformed those least able to load their aircraft by nearly 4% a month on average over the last 18 months. This compounds to a hefty 71% over the time frame.

This factor tilts in favour of US firms which have five of the five firms in the top ranked group of airlines by load factor. Popularity also doesn’t appear to be a factor as Allegiant and Spirit, companies which are more used to topping list of most complained about airlines, rank the highest amongst their US peers in the load factor score. Investors also don’t seem to care as their shares have returned 69% and 253% respectively in the last 18 months, while shorts have covered nearly all their positions in Allegiant after being heavily involved in the firm.

Looking beyond the states, Deutsche Lufthansa and Easyjet come in as the two airlines filling the most seats. Note that Lufthansa’s recent profits warnings has dragged down the performance of the group somewhat over June.

Fuel a problem

As for the factors that investors have been seeking to avoid, having a large proportion of operating expense tied to fuel prices ranks badly amongst factors. The 20% of companies which have the largest proportion of their operating expense linked to fuel have seen their shares sink consistently over the last five months as energy costs surged across the globe. On a relative basis, these five airlines have underperformed global airlines by 12%.

Honours for worst ranking firm go to Skywest whose shares have fallen by 20% year to date.