Why Deutsche Bank Sees Airlines Flying High

Deutsche Bank just released a report on the December outlook for the airline industry, and analysts see a strong month ahead.

Recurring Themes At Investor Days

After attending the investor days for both Hawaiian Holdings Inc HA and Alaska Air Group Inc ALK, Deutsche Bank identified some common themes that were addressed.

Both airlines are expecting capacity growth in 2015, with Alaska Airlines projecting 8 percent growth and Hawaiian Airlines projecting 4 to 7 percent growth. While Hawaiian’s capacity growth is more modest for 2015, it comes on the heels of blistering 18 percent growth from 2011 to 2013.

Another common theme at the investor days was capital return. Analysts predict Hawaiian Airlines to have a free cash flow yield upwards of 25 percent, highest among all U.S. airlines covered by Deutsche Bank. Hawaiian Air management mentioned dividend payment, share buybacks, or paying down debt as three possible options for excess cash in 2015.

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Likewise, Alaska Air plans to return over $420 million to shareholders in 2015 via dividends and buybacks after returning $415 million in 2014.

Low Oil Prices Aren't Helping

While low fuel prices are generally good for the airlines, the boost may not be as strong for some airlines as investors think. Many of the larger airlines hedge against oil price volatility, essentially locking in fuel prices long term. To make matters worse, analysts expect that some carriers will likely have to post large cash collateral after the value of their hedge positions have plummeted recently.

Capacity Projections

The report also included Deutsche Bank’s global and domestic capacity growth projections for the month of December.

Analysts are expecting 2.7 percent year-over-year capacity growth for North American domestic flights in December, including domestic capacity growth for Delta Air Lines Inc DAL (4.1 percent), American Airlines Group Inc AAL (2.2 percent) and Air Canada (6.3 percent). United Continental Holdings Inc.’s UAL year-over-year domestic capacity is expected to decline by 3.4 percent. The 2.7 percent growth rate in domestic capacity is expected to continue into Q1 2015.

Intercontinental capacity is projected to grow worldwide in December as well, as Deutsche Bank predicts a 3.7 percent increase in transatlantic capacity and as much as a 7.1 percent year-over-year growth in North America-Asia capacity.

If growth trends like these continue, 2015 looks to be another outstanding year for airlines.

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