Despite the current market scenario owing to recessionary concerns, the aviation industry is undergoing a transformative phase following the easing of travel restrictions and the reopening of the global economy. The International Air Transport Association (IATA) reported strong demand growth in air travel for March 2023, with the total traffic rising 52.4% year-over-year.
The scenario will likely get brighter in the summer season. Given the industry’s bright prospects, it could be wise to keep a watch on fundamentally sound stocks Deutsche Lufthansa AG (DLAKY), Gol Linhas Aéreas Inteligentes S.A. (GOL), and Air France-KLM SA (AFLYY).
After a prolonged period of pandemic-induced challenges, the aviation industry is now witnessing a highly positive outlook. Pent-up demand for flight tickets following the pandemic remains elevated. On top of it, the northern hemisphere summer travel season is expected to create robust demand for air travel.
According to an American Society of Travel Advisors (ASTA) survey, 63% of respondents have concrete travel plans in 2023, and 39% reported already having spent more on travel this year. The number of average actual business trips skyrocketed by 54% in the last six months, while leisure travel trips were up by 14%.
According to the IATA, 2023 is anticipated to yield a net profit of $4.7 billion for the airline industry, accompanied by a projected demand for over four billion passengers. IATA predicts that total industry revenues in 2023 will reach $779 billion.
Also propelling market growth is an increase in expenditure on air travel. According to Emburse Data Insights, in the first quarter of 2023, spending on air travel increased 85% domestically and 285% internationally year-over-year.
Moreover, owing to the upward trajectory of disposable income, the expanding middle-class population, and a surge in travel demand worldwide, the global airline industry market is poised to exhibit a robust CAGR of 25.5% from 2022 to 2027.
With that being said, let’s evaluate the fundamentals of the featured stocks in detail.
Deutsche Lufthansa AG (DLAKY)
Headquartered in Cologne, Germany, DLAKY is an aviation company operating through its Network Airlines; Eurowings; Logistics; MRO; and Catering segments. It offers services such as passenger services, airfreight container management services, e-commerce solutions, repair and overhaul services for civil commercial aircraft, etc.
On May 2, it was announced that Käfer had been selected as the new catering partner for the DLAKY First Class Lounges and in the First Class Terminal at Frankfurt Airport.
HON circle members and first-class guests can anticipate a superior experience with premium offerings, freshly prepared food, and personalized hospitality. This should help the company to enhance its offerings and deliver a premium product experience to its customers.
On April 5, DLAKY entered into a sales agreement with private equity firm AURELIUS for the divestment of the remaining business of LSG Group. The divestment of the catering segment is part of DLAKY's strategy to focus more on its airline business in the future.
This transaction is anticipated to yield positive outcomes for the company, including improved operating margin and enhanced capital return.
DLAKY’s total revenue increased 40.3% year-over-year to €7.02 billion ($7.58 billion) in the first quarter (ended March 31, 2023), while its cash flow from operating activities rose 5.7% from the year-ago value to €1.58 billion ($1.71 billion).
The company’s adjusted free cash flow came in at €482 million ($520.85 million). Also, Lufthansa Group airlines had 22 million passengers on board compared to 13 million in the same period last year.
Street expects DLAKY’s revenue and EPS for the third quarter (ending September 2023) to increase 17.1% and 49.3% year-over-year to $11.75 billion and $1.02, respectively. Moreover, it surpassed the revenue estimates in three of the trailing four quarters, which is promising.
DLAKY’s shares have gained 64% over the past nine months to close the last trading session at $10.35.
DLAKY’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Value. In the 27-stock B-rated Airlines industry, it is ranked #2. To see additional POWR Ratings of DLAKY for Momentum, Stability, Sentiment, and Quality, click here.
Gol Linhas Aéreas Inteligentes S.A. (GOL)
Headquartered in São Paulo, Brazil, GOL provides scheduled and non-scheduled air transportation services for passengers and cargo; and maintenance services for aircrafts and components globally. It operates a fleet of 146 Boeing 737 aircrafts with 674 daily flights.
GOL’s total net revenue increased 52.8% year-over-year to R$4.92 billion ($983.53 million) in the first quarter (ended March 31, 2023), while its operating profit improved significantly from the year-ago value to R$796.49 million ($159.22 million).
The company’s adjusted net income for the period came in at R$1.17 billion ($234.01 million), representing a 153.4% year-over-year increase. During the same period, its cash and cash equivalents amounted to R$286.46 million ($57.26 million), up 69.5% compared to R$169.04 million ($33.79 million) as of December 31, 2022.
The consensus revenue estimate of $3.81 billion for the fiscal year 2023 (ending December 31, 2023) represents a 28.8% improvement year-over-year. The consensus EPS estimate for the current year is expected to be $0.37. Additionally, it surpassed the consensus revenue estimates in three of the trailing four quarters.
Over the past three months, the stock has gained 28.9% to close the last trading session at $3.08.
GOL’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a B grade for Growth, Sentiment, and Quality. Within the same B-rated industry, it is ranked #5. Click here to see the other ratings of GOL for Value, Momentum, and Stability.
Air France-KLM SA (AFLYY)
Based in Paris, France, AFLYY offers scheduled aircraft services for the transportation of passengers and cargo and aeronautical maintenance in Metropolitan France, Benelux, the rest of Europe, and internationally. The company operates through Network; Maintenance; Transavia; and Other segments.
On April 18, AFLYY, Air France, and KLM executed two revolving credit facilities totaling €2.2 billion ($2.38 billion), as per the announcement made during the fiscal year 2022 results presentation on February 17, 2023. What sets these facilities apart is the incorporation of specific Environmental, Social, and Governance (ESG) Key Performance Indicators (KPIs) within the financing terms.
These indicators align with AFLYY's overall commitment toward sustainable development and the gradual reduction of carbon emissions from its operations.
In the same month, AFLYY and CMA CGM Group announced the effective launch of their long-term strategic air cargo collaboration, which was previously announced in May 2022.
Through this collaboration, the two entities are set to combine their respective cargo networks, leveraging their unique strengths, extensive freighter capacity, and specialized services to create a highly compelling offering in the air cargo industry while accelerating the expansion of their cargo business.
For the first quarter of the fiscal year 2023, which ended March 31, 2023, AFLYY’s revenue from ordinary activities increased 42.4% year-over-year to €6.33 billion ($6.81 billion), while its EBITDA rose 29.4% from the year-ago value to €286 million ($309.05 million).
The company’s adjusted operating free cash flow increased 8.4% from the year-ago value to €683 million ($738.06 million). Also, it witnessed strong demand, with 19.7 million passengers onboard, up 35.3% from the previous year.
Analysts expect AFLYY’s revenue to increase 20.3% year-over-year to $8.24 billion for the second quarter (ending June 30, 2023), while its EPS is expected to be $0.18 in the same period. Moreover, it surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 31.6% year-to-date to close the last trading session at $1.79.
It’s no surprise that AFLYY has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value and a B for Quality. Out of 27 stocks in the same industry, it is ranked #3.
In addition to the POWR Ratings we stated above, we also have AFLYY ratings for Growth, Momentum, Stability, and Sentiment. Get all AFLYY ratings here.
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DLAKY shares were trading at $10.46 per share on Monday afternoon, up $0.11 (+1.06%). Year-to-date, DLAKY has gained 27.02%, versus a 10.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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