Investing in airlines makes sense when they’re in crisis. That was the case for Warren Buffett in 1989, when he plunked down $358 million to buy preferred stock in US Airways. It also made sense in 2001, when three airlines sought bankruptcy protection over the course of six weeks, Buffett bought stakes in all three.
We don’t all have Warren Buffets talent though, so airline investors need to keep the big picture in mind. But one things for sure, the last 18 months have certainly been a crisis for the airline industry, so is now the right time to take advantage?
Airlines represent an interesting market analyse because they are required by law to make money, which means there is no irrational exuberance or bubble pushing stock prices up before they come crashing down. On the other hand, airlines also require huge capital expenditures, making them risky and vulnerable. This means good management and good cash reserves are important.
Airline industry and challenges
The airline industry is recovering from one of its worst crisis to date with Coronovirus bringing the entire industry to a complete standstill, but it’s the recovery that investors are interested in. Which airlines will bounce back and have endured the least damage?
The travel industry is a tough market to compete in, and the airline industry is no exception. Numerous airlines have gone bankrupt in recent years, while others eke out a living by flying unprofitable routes at low prices.
The global economic recession caused revenue among all airlines to decrease significantly. In an effort to cut costs even further and stay aloft, many airlines have laid off staff, cut salaries and benefits, made structural changes to reduce management layers, merged with competitors or grounded aircraft.
Many of the biggest names in aviation are struggling financially. British Airways posted its first loss since privatisation earlier this month, while Air France-KLM reported a €100 million loss for the second quarter and third quarter revenue isn’t looking promising.
There’s no escape from the fact that airline stocks have been hammered (and many investors question if they’ll ever see their investments bounce back) but airlines are airlines and they need to be incorporated into your investment plan.
Rising Interest Rates
Rising interest rates mean airline companies are seeing a boost in profits, but consumers are feeling the pain.
In a report from travel news site Skift, the rise of interest rates have seen an increase in airline company profits while leaving consumers trembling over their next vacation plans.
The main reason for this is the increase of interest rates directly impacts how airline companies raise money to pay for their aircrafts, technology and other investments.
“Higher rates provide an opportunity for airlines to refinance their high-cost debt more cheaply, easing pressure on earnings,” Moody’s vice president Mickey Chadha says in the Skift article. “For airlines that have strong cash flows relative to interest expense, this results in higher unrestricted cash balances.”
Another factor is the inflation index has also seen a moderate boost since last year. This means consumers are paying slightly more at stores which will make them less likely to want to spend as much money on vacations.
Delta Air Lines (DAL)
Delta Air Lines Inc are an airline based in Atlanta, Georgia in the United States. Delta operates over 5400 flights daily and serves an extensive network of destinations spanning the globe, ranging from Mexico to Amsterdam and India to Australia. Delta’s fleet is comprised of Boeing 747s, Airbus A330s, A319s, A320s and Boeing 717s.
Delta Air Lines have a market cap of $35 billion and generate $38 billion in annual revenue. Delta Air Lines usually rank highly in the list of safest airlines in the world, largely due to their exemplary fleet of Boeing aircraft.
During the pandemic, Delta Air Lines carried 3.8 million passengers, an average of eight thousand people per day.
Delta’s fleet of Boeing 747s were used extensively during the pandemic to transport as many as 100,000 citizens per week out of danger zones, as well as delivering supplies and aid into those areas. Because of their size, these planes could carry an incredible amount of supplies to disaster zones. Pilots and cabin crew worked extra hours over the course of the pandemic to ensure that there were no delays or hold ups in their efforts to save lives.
Delta Air Lines CEO is Ed Bastian and he told investors that the airline could be heading for record profits by 2023. In anticipation of the massive wave of profits, Delta is planning to invest $1 billion on new jets and airport upgrades.
The out look for Delta Air Lines is positive heading into 2022 when they expect to return to high demand levels. They are also looking to expand their presence in New York with the addition of new routes, although they have no plans to base any aircraft here.
United Airlines Holdings ( NASDAQ:UAL)
United Airlines Holding is the holding company for United Airlines, Inc. The Company’s principal business is the operation of United Airlines through Chicago O’Hare International Airport (ORD).
Unites Airlines have a market cap of $9.74 billion and over the last 12 months, UAL has declined by -11.52%, with a PE Ratio of 21.28 . The company does not pay a dividend.
Southwest Airlines (NYSE:LUV)
Southwest Airlines has a reputation for being one of the best run airlines in the industry. And this is reflected in Southwest’s stock price and its market share. The airline is known for its unrivalled customer service and it’s the only major carrier which has never gone into bankruptcy or failed to meet its financial obligations. Southwest is also very profitable, reporting $1 billion in net income during 2014, $4.2 billion over the past ten years and $8 billion in free cash flow.
The airline doesn’t own much in the way of physical assets. Therefore, most of its costs are variable costs which means that the airline has a very high margin on its revenues (no expenses other than fuel). According to Southwest’s 2014 Investor Presentation , it has an average operating margin of 18%, which is more than double all other major US carriers.
Southwest are a budget operator and the ticket prices reflect this. According to Farecompare , a typical one way fare for a flight from Dallas Love Field to Chicago Midway is $100. Flights which originate out of Midway, such as those coming from Atlanta or St Louis, are typically cheaper at $62 and $65 respectively. These low cost prices will always be in high demand for leisure travelers and business travelers alike.
American Airlines Group are an airline company based in the United States. They recently filed a patent for a new type of boarding system that speeds up the process and would allow more people to fit onto an aeroplane.
The idea is simple, hand luggage is loaded into compartments above the seats and passengers are seated in groups of two or four based on queuing rules.
The American Airlines chief executive, Doug Parker , said “Our intention is to create an innovative seating arrangement that builds upon the success of today’s ‘pairs’ seating model”.
The delta variant has caused American Airlines to cut their outlook with demand taking a hit. Investors remain confident though and the share price suggests the delta variant isn’t a big concern for American Airlines.
Spirit Airlines (NYSE:SAVE)
Sprit Airlines are a Florida-based airline company where the motto is ‘unbundling the sky’. Their low fares mainly depend on a customer being willing to pay for services separately, not including in the ticket price. They offer a range of discounts and deals if you are willing to book one way or another, be only mildly picky about
Again, demand trends for Spirit Airlines have taken a slight downturn as the delta variant creates uncertainty for air travel. Spirit are yet to get close to their pre pandemic levels of revenue and profit but the outlook for 2022 is positive.
For long term investors, Spirit Airlines looks like a good bet. The only concern with the way things are going is that they may soon run into competition problems as other companies reduce services, meaning lower airfares for everyone.
There are no shortages of problems facing the airline industry today, but Spirit Airlines’ growth appears to be on track to make them one of the more attractive airline stocks.
Alaska Air Group (NYSE:ALK)
Alaska Air Group are one of the biggest names in US aviation. They have a number of subsidiaries that allow them to provide services across just about every part of the United States, excluding Hawaii which is serviced by their sister company, Alaska Airlines.
Alaska Air Group are well known for operating an all-Boeing fleet and this is mainly down to the fact that Boeing offer a far cheaper and reliable option than Airbus. This is precisely why Alaska Airlines, their sister company, run an all-Boeing fleet as well. Alaska Air Group operates a number of subsidiaries under the brand “Alaska” such as:
Frontier Alaska (includes brands such as: Frontier, Great Lakes Airlines and Peninsula Airways)
Virgin America (includes brands such as: Virgin America and V Australia)
Porter Airlines (Canada)
And they also operate Horizon Air Industries which runs flights for other airlines such as JetBlue.
JetBlue Airways are an airline company based in the United States. The company operates as a low-cost carrier and is headquartered in Long Island City, New York. JetBlue Airways operate flights to various domestic and international destinations such as Canada, the Caribbean, Mexico and the United States.
The CEO is Ursula Hurley who was appointed to the position in Sept 2021.
The company first began operations on February 11, 2000 with flights from Buffalo to Fort Lauderdale. Today they have close to 60 aircrafts, operating over 500 daily flights across the United States and Mexico for destinations including Boston, Las Vegas, Washington D.C., New York City and Orlando.
JetBlue have an operating revenue of $3.7 billion and have some 34,000 employees.
Other Airline Stocks
Airline companies are struggling currently so whichever airline you consider investing in, make sure they can weather the next few years and beyond. It may turn out to be the best time to invest in travel services such as airliners, but if they go bust before realising a return, you’ve lost your capital. Market data suggests airline stock in general is rallying and the outlook is confident but again, we still need to be looking at sound businesses.
For some people, airline stocks are difficult to read because it’s very difficult to value them. What’s the value of an airline stock built on? Brand? Demand? Management? All very difficult to value.
Airline stocks have the potential to provide excellent returns if the airline industry continues its recovery from the unprecedented events of the last couple of years, which it simply has to. Air travel is a crucial component of the economy so as we mention numerous times throughout this article, the investment choice depends on the robustness of the airline company itself. Could the company you’re considering take more fluctuations in demand and uncertainty or would that finish them off?