Its earnings time again! This is the time when the investor community is busy comparing estimates with actual outcomes. Prior to the releases, investors would look to add stocks that have the potential to surpass earnings expectations in the quarter. This is because an earnings beat positively impacts the stock price. Given this backdrop, the obvious question is how to find potential winners?

Through this write-up, we aim to help investors find airline stocks that are likely to report better-than-expected earnings per share in the fourth quarter of 2017. Notably, airline stocks are an integral part of the Zacks Transportation sector (one of the 16 Zacks sectors).

The fourth-quarter earnings season will be kicked off by Delta Air Lines (DAL - Free Report) on Jan 11. The company carries a Zacks Rank #3 (Hold). 

The overall sentiment pertaining to airlines is quite positive ahead of the earnings season. This is because airline stocks seem to be back in favor after struggling for most of 2017 due to multiple headwinds like the back-to-back hurricanes and unit revenue issues, among others.

Contrasting Price Performances Signal Improvement

Post hurricanes, things are looking up for airline stocks. This is evident when comparing the price performance of the Zacks Airline industry with the S&P 500 Index in the first nine months and the last three months of 2017.

While the industry gained only 1.8%, the S&P 500 index rallied 12.6% in the first nine months.  However, the industry handily outperformed the S&P 500 index in the final quarter of 2017, rallying 12.9% compared with the S&P’s gain of 6%.

Why the Bullish Scenario

The improving scenario can be made out from the bullish fourth-quarter unit revenue forecasts from key sector players like Delta and Hawaiian Holdings (HA). Moreover, the likes of United Continental Holdings (UAL - Free Report) and JetBlue Airways (JBLU - Free Report) announced new share buyback programs during the same quarter. These shareholder-friendly initiatives bear testimony to the solid financial health of carriers.

Furthermore, the robust financial health of most carriers has prompted them to invest substantially in improving the flying experience for passengers, in a bid to stay afloat in the competitive airline space. Also, high fuel costs, which might limit bottom-line growth, are likely to boost the top line by raising ticket prices.

Impressive performances of carriers in the Thanksgiving travel period and the winter holiday season are likely to boost their top-line performances as well. In fact, strong demand for air travel on the back of an improving economy, a much-improved job market and rising disposable income is likely to aid results in the to-be-reported quarter.

Zacks Industry Rank Highlights the Favorable Scenario

The improving scenario for the airline space is well reflected by the bullish Zacks Industry Rank of 83 carried by the 24-member Zacks Airline industry. Notably, the favorable rank places the industry in the top 32% of the 250+ groups. The positioning indicates a positive outlook. We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one week rebalance, the top half outpaced the bottom half by a factor of more than 2 to 1.

The Zacks Industry Rank for this sector has improved immensely, given the industry’s 200+ rank only a few months ago.

Given the favorable backdrop, it is very much likely that airline stocks will perform well in Q4. Naturally, it is a prudent idea to add such stocks to one’s portfolio for handsome returns.

Selection of Outperformers

With the airline space being densely populated, the task of selecting the right stocks is by no means an easy one. Given the numerous stocks in the sector that almost always muddle one’s stock-picking prowess, the Zacks methodology could offer some relief.

Our research shows that for stocks with the combination of a Zacks Rank #1, 2 (Buy) or 3 (Hold) and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

5 Airline Picks

Based on the above methodology, we have zeroed in on five airline stocks that are likely to beat the Zacks Consensus Estimate for earnings in Q4. An earnings beat boosts investors’ confidence in the stock, which is reflected in its rapid price appreciation. These stocks could, therefore, turn out to be great additions to your portfolio ahead of their earnings releases.

American Airlines Group (AAL - Free Report) headquartered in Fort Worth, TX, operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe. The company has a Zacks Rank #3 and an Earnings ESP of +4.54%. This is because the Most Accurate estimate is pegged at 4 cents above the Zacks Consensus Estimate of 72 cents. The favorable combination makes earnings beat likely in the quarter.

The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 1.4% upward over the last seven days. American Airlines is expected to report fourth-quarter 2017 results on Jan 26.

United Continental Holdings (UAL - Free Report), based in Chicago, is also expected to report better-than-expected earnings in the fourth quarter by virtue of its Zacks Rank #3 and an Earnings ESP of +3.37%. This is because the Most Accurate estimate is pegged at 4 cents above the Zacks Consensus Estimate of $1.

This holding company for both United Airlines and Continental Airlines is scheduled to reveal its results on Jan 23. The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 5.3% upward over the last 30 days.

Our next choice in the list of likely outperformers with respect to the bottom line in the fourth quarter is the Dallas-based Southwest Airlines (LUV - Free Report). This low-cost carrier has a Zacks Rank #3 and an Earnings ESP of +5.02%. This is because the Most Accurate estimate is pegged at 4 cents above the Zacks Consensus Estimate of 85 cents.

The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 1.2% upward over the last 60 days. Southwest Airlines is scheduled to report fourth-quarter 2017 results on Jan 25.

Next is JetBlue Airways (JBLU - Free Report), based in Long Island City, NY. This low-cost carrier has a Zacks Rank #3 and an Earnings ESP of +6.06%. This is because the Most Accurate estimate is pegged at 2 cents above the Zacks Consensus Estimate of 33 cents.

The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 10% upward over the last 30 days. JetBlue Airways is expected to report fourth-quarter 2017 results on Jan 25.

Our final choice is Gol Linhas Aereas Inteligentes S.A. (GOL - Free Report), a low-cost and low-fare carrier, headquartered in Sao Paulo, Brazil. The company has a Zacks Rank #1 and an Earnings ESP of +39.44%. This is because the Most Accurate estimate is pegged at 10 cents above the Zacks Consensus Estimate of 25 cents.

The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 78.6% upward over the last 30 days. GOL is scheduled to report fourth-quarter 2017 results on Mar 7.