Entering the summer, airplane travel will soon increase, as people fly across the country hoping to get away for vacation, or meet relatives, or go to business meetings if they are stuck at their jobs. This current quarter is when travel is at its peak, and also when oil prices tend to rise with the increased demand from the oil-guzzling jets. This year though there is another factor: the tax man.
It provides a headache for an industry that has faced unprecedented challenges this past decade, from terrorism threats, to TSA searches, to increasingly volatile oil prices, its never been a good market for investors to get into. However, there are some investors that like airline stocks, and for some of them, despite the volatility, they can be an affordable way to boost one’s portfolio. The question is, which ones?
For Southwest Airlines Co. (NYSE:LUV), the $14 tax is the biggest concern so far. Since Southwest Airlines Co. (NYSE:LUV)operates on a point-to-point basis rather than a hub-and-spoke system, it can turn flights around very quickly once they land. This helps the company offer cheap flights to passengers that just want to get from point A to point B without many bells and whistles attached. This does mean that an extra $14 will unnerve some of Southwest Airlines Co. (NYSE:LUV)’s clients, who generally tend to be middle-class people that just want a cheap way to cross the country. For only $280, a customer can get a one-way ticket from New York to San Francisco, and a round-trip can go for as little as $449, so it would be noticeable, especially if on a budget.
Delta Air Lines, Inc. (NYSE:DAL) has probably been the busiest airline these past few months with expansions into Latin America. Just last month, Delta Air Lines, Inc. (NYSE:DAL) expanded operations into Belize, Guatemala, and Costa Rica, as it tries to grow the increasing amount of traffic to and from Latin America. This is also taking advantage of expanded terminals at New York’s JFK airport and Los Angeles, which were worth over $1.6 billion combined. These would provide better runways, as well as a better airport experience for customers, which will help Delta’s brand.
The $14 tax won’t have as much of an effect on Delta, because Delta Air Lines, Inc. (NYSE:DAL) is a slightly more premium airline than Southwest Airlines Co. (NYSE:LUV), offering the same New York to San Francisco connection for closer to $500, but has a more expanded business class than Southwest Airlines Co. (NYSE:LUV), signifying it’s a more serious airline that has a passenger base that would barely notice an extra $14 fee, much less care about it.
JetBlue Airways Corporation (NASDAQ:JBLU) is probably the most luxurious aircraft of the three, because it was one of the first to put satellite TV in the backs of seats, a comfort few other airlines have. Of course this comes at a price. The New York-San Francisco connection is nearly double what Delta Air Lines, Inc. (NYSE:DAL) and Southwest Airlines Co. (NYSE:LUV) offer, at nearly $680 minimum for roundtrip tickets in economy class. Therefore, the $14 tax would definitely not have an impact on JetBlue Airways Corporation (NASDAQ:JBLU). With that price; its customers are flying because they enjoy the unique luxuries that JetBlue offers.
JetBlue has also been able to expand this year as well, adding Philadelphia to its list of hubs, a wise move given Philadelphia’s proximity to southern New Jersey and the Beltway. This should increase revenues for the company over the course of the year, as it will have a presence in a high volume area.
The big statistic when looking at airlines, and what keeps a lot of people away from them, is operating margins, which are typically very low, and are very susceptible to fluctuations in oil prices. With oil hitting $94/barrel, and rising, it makes the statistic all the more important. Delta Air Lines, Inc. (NYSE:DAL) has the safest margins at 6.95%, as well as a profit margin of 2.43%. They are pretty low, but not dangerously low. JetBlue has operating margins of 6.62%, with profit margins of 2.21%, and the Philadelphia expansion should help give those numbers a boost. Southwest is the trouble spot at the moment with operating margins of 4.97% and a profit margin of 2.22%. If the tax goes through, and given Southwest’s consumer base, this could mean problems in the future for the company.
For investors, it’s still not the greatest place to put one’s money in, but given that it is the summer, there are some gains to be had. JetBlue is probably the best company to own right now. Its P/E is a solid 17.15, and its E/P ratio is at 5.86%, so it is a pretty strong company that has been increasing equity holdings for four straight quarters, while paying down debts and obligations, creating an equity-rich company that is set up for the long term, thanks to an ROE of 6.06%.
Delta Air Lines, Inc. (NYSE:DAL) is the next best investment with a slightly cheaper P/E of 16.69 and an E/P of 6%, so for those that want a cheaper alternative, Delta is a pretty good bet, especially with the expansion of its Latin American operations. The only concern is that its ROE is -6.08% due to numerous capital investments and borrowing that the company has done, but it has a positive cash flow of $220 million, and investments are starting to have returns, so if the trend holds, it shouldn’t be too scary for a lot of people.
Southwest is definitely on shaky ground, not only with the potential of customers paying an additional $14, but also with the rising cost of oil, which will do more damage to them then its two competitors. Unlike Delta, stockholder equity has dropped for Southwest – by $36 million last quarter, while liabilities have increased by $632 million, neither of which is a direction in which a company should be heading. Its P/E is the highest of the group at 26.37, while its E/P is the lowest at 3.77%. Its ROE may be a solid 5.44%, but with net income falling by $19 million last quarter, it won’t be that good for long.
So let’s buckle up and turn off all our electronic devices. The summer travel season has begun.
The article Can These Airlines Make Your Portfolio Take Off? originally appeared on Fool.com.
John McKenna has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. John 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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