Use U.S. airlines results to play emerging market carriers

Over the past few weeks, a host of U.S. airlines reported earnings, with the majority beating expectations. Investors can potentially extrapolate an investment thesis in emerging market carriers from these results.

Image Courtesy: Pedro Paulo Silva de Souza

The parent company Transportes Aereos Meridionais looks like a good bet before earnings

With the exception of United (UAL, quote), which missed due to merger-related issues, U.S. airlines like Delta (DAL, quote), US Airways (LCC, quote), and Alaska Airlines (ALK, quote) all handily beat expectations.

Most companies saw strong sales and higher revenue. Most importantly, margins for developed carriers improved thanks to lower fuel costs.

While many airlines were beaten up earlier in the year as oil soared, as the global economy continues to slow, the price of crude has fallen substantially. As a result,  airlines have benefited.

And while most American airlines have already reported, many emerging market carriers have not. In particular, two of our favorites in the sector have still yet to release earnings: LATAM (LFL, quote) and COPA (CPA, quote).

Both Latin American carriers are well-positioned to report solid earnings for a number of reasons.

First, there is little evidence that demand softened in the previous quarter, as American carriers serving Latin America indicated that these markets remained strong. In fact, Latin America is the most profitable market for U.S. airlines.

Second, the bottom line for both of these emerging market carriers are likely to benefit from lower oil prices. Although both have fuel hedges in place, because the majority of their fuel is not hedged, LATAM and COPA are able to take advantage of the most recent vacillations in the price of oil.

Third, both LATAM and COPA have more effective cost structures than their American counterparts. Although it’s too early for LATAM to see any real synergies from its merger earlier this year, the company is unlikely to have the same problems that United is having as LATAM is allowing LAN and TAM to operate as separate airlines.

In light of the above, investors could see a nice pop in emerging market carriers after they report earnings.

Author may start a position in CPA or LFL next week.


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