Oil prices have retreated substantially since October. That would seem to be good news for airlines. Yet most airline stocks have declined over the past few months -- and particularly since the beginning of December -- due to worries about a potential unit revenue slowdown. Investors are particularly worried that low oil prices could encourage airlines to grow too quickly, leading to a glut of seats at some point in 2019.
In the past month or so, several airlines have cut their revenue per available seat mile (RASM) forecasts for the fourth quarter, including industry giants American Airlines and Delta Air Lines. This has provided ammunition for the bears. Yet recent investor updates from JetBlue Airways (NASDAQ:JBLU) and Alaska Air (NYSE:ALK) show that there are still some bright spots in the airline industry.
JetBlue stays on track
In the first nine months of 2018, JetBlue's RASM rose 2%. That wasn't nearly enough to offset a surge in fuel costs and labor cost inflation.
Entering the fourth quarter, JetBlue expected RASM to increase 1% to 4%, despite facing a tougher year-over-year comparison. The carrier started to benefit last quarter from various initiatives designed to boost unit revenue. These moves included cutting underperforming routes, raising baggage fees, and adjusting other fees.
Last week, JetBlue confirmed that RASM increased about 2.4% in the fourth quarter. That result is right in the middle of its guidance range and marks a slight acceleration relative to the first three quarters of 2018.
JetBlue implemented a second, larger round of route network changes in early January. It is also slowing its expansion in 2019. Those moves should drive further acceleration in the carrier's unit revenue growth rate over the next few quarters.
Alaska Airlines is on an even better trajectory
In 2017 and 2018, Alaska Air experienced severe margin compression, thanks to a combination of soaring fuel costs, increased competition on the West Coast, and merger-related headwinds from its late-2016 acquisition of Virgin America. For example, during the first nine months of 2018, Alaska's economic fuel cost per gallon surged 28.4% and nonfuel unit costs rose 3%, while RASM fell 2.3%.
However, like JetBlue, Alaska has implemented numerous changes to its route network, fees, and fare structure in order to accelerate its unit revenue growth. As a result, it entered the fourth quarter with higher hopes, calling for RASM to rise 1.5% to 3.5% year over year.
Alaska Airlines has raised its Q4 revenue guidance three times since then. Following its most recent investor update, the carrier expects to report strong RASM growth of about 5.1% for the fourth quarter. That should be sufficient to hold Alaska's pre-tax profit roughly flat despite a significant year-over-year increase in its fuel costs.
Looking ahead to 2019, the benefits from Alaska Airlines' revenue growth efforts should continue to ramp up. The company expects to capture $130 million of incremental merger synergies in 2019, as well as the bulk of an expected $240 million benefit from other revenue initiatives. This will likely drive continued strong unit revenue growth.
Two great airline stocks for 2019
There are a number of potential explanations for why JetBlue and Alaska Airlines have avoided the unit revenue setbacks that impacted some of their competitors recently. A greater focus on the domestic market, easier year-over-year comparisons, recent route network changes, and company-specific revenue initiatives could all be contributing factors.
In any case, both airlines seem well-positioned to outperform the airline industry in terms of unit revenue growth this year. That would lead to explosive earnings growth, as fuel costs have fallen considerably from the levels seen during most of 2018.
Despite this brightening outlook, shares of Alaska and JetBlue remain quite cheap, providing huge potential upside for investors if the airlines continue their recent outperformance in 2019.
Adam Levine-Weinberg owns shares of Alaska Air Group, Delta Air Lines, and JetBlue Airways and is long January 2020 $20 calls on American Airlines Group and long January 2019 $10 calls on JetBlue Airways. The Motley Fool owns shares of Delta Air Lines. The Motley Fool recommends Alaska Air Group and JetBlue Airways. The Motley Fool has a disclosure policy.