A company with growing margins
Although Alaska Air Group, Inc. (NYSE:ALK) is not as well-known as other airlines, it is still the sixth largest in the U.S. and, for many, the one offering the best growth prospects. This forecast is based on the fact that it will benefit from declining jet fuel prices and the deceleration of Virgin America’s expansion in the Northwest.
The company has received the highest customer satisfaction rating from J.D. Power for the past five consecutive years. Studies show that customer satisfaction is correlated to higher revenue, client loyalty, and stock prices. Alaska Air Group, Inc. (NYSE:ALK) offers excellent growth and profitability ratios, considerably better than the industry averages.
Last quarter’s results portray an encouraging outlook: on a per share basis, adjusted earnings improved 59% on a 57% increase in net income and a 2% reduction in diluted shares. Despite considerable increases (about $70 million) in non-fuel operating costs and fuel expenses, revenues grew 9%, principally due to an 8.7% increase in capacity.
Analysts agree on the outstanding labor relations present in this company. Its “Performance Based Pay Plan” seems to satisfy employees, management, customers, and investors as it encourages better safety, customer satisfaction, cost control, and maintaining of profit margins through salary bonuses.
A market share leader
Another buy case is Delta Air Lines, Inc. (NYSE:DAL) that recently reported the best March quarter earnings in over ten years. Net profit was up astronomically, from a $39 million loss during Q1 last year to an $85 million income last quarter. Yahoo! Finance highlights three catalysts for this:
“Passenger revenue increased 1.4%, or $107 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 4.1%, driven by a 2.1% improvement in yield.
Cargo revenue decreased 2.4%, or $6 million, on declining freight yields.
Other revenue decreased 1.4%, or $14 million, as a result of lower third-party maintenance revenue.”
In addition, this industry leader provides several other reasons to invest:
The Northwest and Virgin Atlantic acquisitions make it the biggest carrier in the industry and position it to face more comfortably the vicissitudes of this sector.
The previously mentioned increase in revenue is a result of investments made to improve operating efficiencies and customer experiences; benefits of these outlays are expected to continue to drive Delta Air Lines, Inc. (NYSE:DAL)’s revenue in the near future. Zacks analysts estimate a 4% to 6% year over year improvement in unit revenue.
Over $3 billion in investments will be deployed during 2013 in order to ameliorate Delta Air Lines, Inc. (NYSE:DAL)’s product offering, services, and airport facilities. Ancillary revenues are expected to keep on improving as these new features and services are launched. Morningstar analysts estimate that these activities could add about $1.5 billion in revenue each year.
Delta Air Lines, Inc. (NYSE:DAL) has shown consistency in increasing its market share. Nowadays, the airline has the highest presence in both of New York’s airports and in Hartsfield-Jackson Atlanta International, the busiest airport in the world.
Delta Air Lines, Inc. (NYSE:DAL) employees have tended to unionization in a lower proportion than competing airlines. As stated by Morningstar analysts, this “puts the firm in a better position to combat inflationary pressures from its workers, relative to its peers.”
The company has considerably reduced its debt, accomplishing a 30% decrease between 2009 and 2012. Interest coverage of 2.7 is close to a 10-year maximum.
A big domestic carrier
After a strong first quarter performance US Airways Group Inc (NYSE:LCC) looks like a buy. The upcoming deal with AMR, the main owner of American Airlines, is expected to largely increase revenue and the company’s penetration in the overseas markets. Buying before this merger actually occurs might result in some serious upside. In addition, some other factors encourage me to recommend this stock:
The AMR merger would make it the biggest domestic carrier while reducing its susceptibility to domestic competition from low cost airlines. US Airways Group Inc (NYSE:LCC)’ strong operating cash flow not only allows this acquisition, but also to reinvest and enlarge its fleet.
In terms of valuation, this stock trades at 3.9x forward P/E, close to its historical minimum and considerably below its peers and the S&P 500 average of 14.6.
Among low-cost airlines, US Airways Group Inc (NYSE:LCC) already holds the highest international presence. Its market share overseas is expected to increase, boosting revenue due to the higher margins that international flights offer to the company.
As explained by Morningstar analysts, “US Airways Group Inc (NYSE:LCC) created a tax plan that could limit the negative impact of Section 382 limitations on AMR’s $6.6 billion in net operating losses.”
Consolidated traffic increased by 4.4% in April compared to a year earlier. This was enabled by an increased capacity and number of domestic passengers.
Bottom line
As the demand for air travel rose and companies found new ways to generate income, such as the offering of ancillary services, the industry started to recoup after a few really bad years. However, anyone considering investing in this business should take into account its high susceptibility to fuel costs, taxes, and union strikes.
In spite of the risks implied, some companies offer attractive prospects for those willing to take chances. Above, I have provided a snapshot view of three companies of this kind. Consider investing; returns should come, but know your risks.
The article 3 Airline Stocks That Are Flying High originally appeared on Fool.com and is written by Victor Selva.
Victor Selva has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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