Southwest Airlines Co. (NYSE:LUV) is another company that is leasing aircraft as opposed to financing them. The company is a customer to Air Lease Corp (NYSE:AL), and its net income will be favored due to lower payments on interest rates. Also, the carrier has the advantage of being able to break any leasing contract (with a penalty fee) if passenger traffic becomes unfavorable.
Delta Airlines, Inc. (NYSE:DAL) is also switching from owning to leasing. The carrier manages a fleet of 719 aircraft, of which 155 are leased, or 21%.
I believe these carriers are taking the necessary measures to increase their net income. Leasing future aircraft will help the airlines reduce their operating expenses and debt.
The underperformer
SkyWest, Inc. (NASDAQ:SKYW) has not fared as well as Republic Airways. The carrier has barely outperformed the S&P 500 by rallying 17%. Nonetheless, it is trading with a P/E of 13.7, and a forward P/E of 10.1. The company’s revenues declined $117 million to $803 million for the first quarter of 2013. Its net income declined $5 million to $15.5 over the same period.
The company’s cash and cash equivalents totaled $631 million, down from $709 million in Dec. 31, 2012. According to the company, the $78 million was used for debt repayment. However, its debt decreased only by $30 million.
I do not feel comfortable with the SkyWest, Inc. (NASDAQ:SKYW) purchase order of 100 new aircraft from Mitsubishi. If things do not go as they planned, it will end up with a massive amount of debt. Even if the company’s load factor remains unchanged after the huge addition in available seat miles, the company will have to pay enormous amounts of cash due to high interest rates, and it will see substantial losses in its net income. I believe it is a risky strategy from the carrier, and it may be riskier for its investors.
The foolish conclusion
Republic Airways and Skywest, Inc. (NASDAQ:SKYW) have rallied this year. Even though Republic Airways has rallied 90%, I believe the carrier offers a higher potential for capital appreciation than Skywest, Inc. (NASDAQ:SKYW). The company is decommissioning aircraft to reduce its operational expenses, and it uses leasing agreements to gain access to newer, more fuel-efficient, and comfortable aircraft.
On the other hand, Skywest, Inc. (NASDAQ:SKYW) will pay a substantial amount of cash in interest rates. Its revenue declined, as well as its net income, and I fear the acquisition of 100 new aircraft might not end up well. For these reasons, I recommend Republic Airways as a long position.
The article A New Business Strategy for Airlines to Increase Profits originally appeared on Fool.com.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. Robinson 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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