Leveraging Air Travel Trends

By Kristina Zucchi, CFA | April 20, 2010 AAA

The airline industry has been one of the hardest hit since the economic downturn. A reduction in business and leisure travel as companies and individuals have tightened their belts, natural disasters such as the volcanic eruption in Iceland and the volatility in fuel oil prices, which have recovered earlier and stronger than a recovery in the overall economy, are all contributing factors. This triple whammy has led to lower and even negative profits from the carriers. But as the economy trends up, airlines should feel the impact.

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Job growth will be a leading indicator for this group - a signal that business travel will increase and that individuals will feel more secure in their jobs and willing to spend on leisure travel. These travel trends do not only affect the carriers. Airport equipment manufacturers should also see the benefit of an economic recovery.

Airport Equipment
Companies that manufacture airport ground support equipment and provide ancillary services are critical to the operations of the airline industry. These services make the airports run smoothly.

John Bean Technologies' AeroTech (NYSE:JBT) and Air T Inc. (Nasdaq:AIRT) provide equipment for ground support, airport services and gate equipment. AeroTech, a $25M profit segment of JBT, has a global footprint in this industry while AIRT has a strong domestic presence in maintenance. Both companies are expected to benefit from a continued growth trend in maintenance outsourcing as well as a projected growth of passenger and cargo traffic. These service and equipment needs are expected to grow faster than the world's economy though 2028. (For more, see The Ups And Downs Of Cyclical Stocks.)

Airport Security
Airport security companies benefit from the growing trends of tighter security needs among all domestic and international airports. These needs are critical for the safety of all passengers. ICx Technologies (Nasdaq:ICXT) is a leader in sensor detection technologies for Homeland Security. ICXT along with competitor Honeywell (NYSE:HON) will benefit from the need for greater airport security, a trend that is expected to persist in the US and abroad for many years.

Despite this positive trend, demand for airport security is impacted by the economy. Although security needs are immune to volatile traffic trends, like the ones experienced over the last few years, airport security growth is dependent on government funding which is impacted by economic growth. Thus a strengthening economy should positively impact the funding levels for this industry.

Traffic Growth
While airline carriers such as American Airlines (NYSE:AMR) and United Airways (NYSE:LCC) are projected to report losses for Q1 2010, the expectation that traffic, both business and leisure, will improve through 2010 into 2011 should bode well for the ancillary services that support the airline industry. Already during the first three months of 2010, carriers have reported improved traffic and fuller planes. The result is a strengthening trend for the overall airline industry. (For more, see Is That Airline Ready For Lift-Off?)

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