Is 2013 going to be the 'Year of the Airlines'?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The earnings season is on the go and the airline industry will "inaugurate" its earnings season by breaking the 4Q earnings of Delta Airlines (NYSE: DAL) on Jan. 22. Along with the earnings season, many people seem confused about the 2013 outlook for the airline industry.

The Street seems extremely optimistic. Barclays believes that there is still room for another 20% capital appreciation in 2013 despite 11% gains in the first 20 days of the year. Goldman Sachs is also bullish on this industry. It believes that a 20% decline on average 2013 EPS expectations for the airline players has set a more reasonable bar for the sector that provides a buffer to any potential downside this year.

Let’s see what the earnings forecast of large airline carriers say (I will cover the smaller airline companies in another post):

Delta Airlines: The company is expected to post an EPS of 28 cents and a quarterly revenue of $8.58 billion. The 4Q12 consensus estimates are appropriately modest, having been revised downward 44% since Oct. 1.  In a year-end memo to employees, DAL’s CEO Richard Anderson promised that the airline will advance its position in 2013 by controlling spending and improving operations. The executives also noted the carrier will start to retire its 50-seat regional jets as new aircraft starts to arrive later in the year.

Given the company’s investor update on Jan. 3, I believe investors will look beyond the quarter and focus on the company’s 2013 outlook. Specifically, the commentary on international traffic trends, progress on the company’s cost-cutting initiatives and updates on the Trainer refinery will be important highlights of DAL’s conference call.  

United Continental Holdings (NYSE: UAL): Network disruptions and weather-related issues provided significant headwinds for UAL in 4Q12, as consolidated traffic was down 3% YoY. The consensus now anticipates a loss of $0.56 in the quarter, down from an expected profit of $0.21 on Oct. 1. Also, the company is expected to post a quarterly revenue of $8.72 billion, which will be down 2.4% YoY.

Although expectations appear modest, the risks could still be skewed to the downside, as the company missed 3Q12 estimates by 8% despite lowered expectations. Let’s see what the company has to announce on its 4Q earnings release on Jan. 24.

Southwest Airlines (NYSE: LUV): The company is expected to post an EPS of 7 cents and a quarterly revenue of $4.22 billion, which will be marginally higher on a YoY basis. I believe the company will meet consensus expectations, with bias skewed to the upside. The investor focus will center on the status of the revenue initiatives announced at the company’s investor day as well updates on the AirTran integration. Investors will likely be interested in any updates the carrier can provide about code sharing, which Southwest expects to begin to phase in starting in the next few weeks.

U.S. Airways (NYSE: LCC): Despite US Airways market cap of only $2.3 billion, I am discussing it with other large-cap airline companies (that have a market cap of above $8 billion) given its potential merger with AMR Corp (NASDAQOTH: AAMRQ), which I have already covered in one of my earlier posts. Among the legacy carriers, US Airways is expected to see the most capacity growth in 2013 (+2.5%) given the ‘upguaging’ and labor agreements that restrict capacity cuts.

Despite that outcome, I continue to expect earnings growth at this company. However, analysts will be interested in the carrier's broader comments and expectations especially in the context of legacy carrier’s that are afforded the opportunity to reduce capacity in times of a tepid economic recovery and volatile and high fuel prices.

Foolish Bottom Line

2013 seems like it will be a good year for airline investors given that this industry is consistently demonstrating capacity discipline. Moreover, the risk-reward story remains quite compelling for this industry.  

AnalystX has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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