Finally! An Amazing Airline Stock
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The airline industry has been notoriously tricky investing terrain. For one, airlines are victims to volatile jet fuel costs, which have constantly plagued major airlines as United Airlines and Southwest Airlines until recently, when jet fuel prices have started to decline.
Moreover, low customer satisfaction due to problems such as flight delay, lost baggage, and additional costs has been a thorn in the side for several companies such as US Airways (NYSE: LCC) and Delta Airlines (NYSE: DAL). The consistently worst offender in customer satisfaction is ultra-low cost carrier Spirit Airlines (NASDAQ: SAVE), which leads the airline industry in piling additional costs on the consumer -- it currently charges a $100 carry-on fee.
The industry is also saturated with competitors that offer hardly differentiated products, making it difficult for specific companies to carve out niches in the airline industry. Moreover, the industry has also historically had problems with labor unions; for example, Spirit Airlines was the focus of a major pilot strike and approximately 50% of its workforce in 2011 was composed of union members.
Even Warren Buffett notably stated in his 2008 annual letter to shareholders that the airline industry was "the worst sort of business," lamenting that the lack of a durable competitive advantage among the airline companies makes the industry "gruesome." With his signature wittiness, Buffett observed, "Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."
However, despite the hostile investing environment of the airline industry, one airline company continues to soar and prosper: Allegiant Travel Company (NASDAQ: ALGT). This moderately large airline, with a market cap of around $1.33 billion, focuses on providing low-cost airfare. The company has already seen its stock increase 31.4% YTD and is barely 1.3% off its 52-week high, indicating strong market demand for the stock. The strength of its stock shows that Allegiant is benefiting from several advantages unique to itself but also from broader economic conditions.
One of these broader economic conditions is a recent decrease in jet fuel prices which has helped Allegiant as well as Spirit Airlines, United Airlines, Southwest Airlines, US Airways, and Delta Airways. Fuel is the single largest expense for airlines and accounts for nearly one-third of the industry's operating expenses. However, jet fuel prices have taken more than a 12% tumble in prices, from a February peak of $3.29 a gallon to $2.72 on June 23. To put that into perspective, a savings of 40 cents a gallon amounts to an annualized "$5.5 billion windfall for the industry," according to JPMorgan analyst Jamie Baker. The decline in jet fuel prices will definitely contribute positively to Allegiant's bottom line.
One of the main advantages of Allegiant's business model is that it doesn't try to do everything and accommodate every passenger, a business strategy bigger airlines such as Delta have adopted. Although this strategy does provide more opportunities to generate revenue, it also comes with a risk of overextending and decreasing profit margins. Instead, Allegiant's strategy is to accommodate leisure travelers in small cities that bigger airlines wouldn't want to touch. Allegiant caters to hundreds of these small cities across the United States through direct flights from these cities to major cities/tourist destinations such as Las Vegas, Orlando, and Los Angeles. Despite intense overall competition in the airline industry, Allegiant experiences little to no competition on its flight routes and, incredibly, has established a niche in the airline industry.
Allegiant has the ability to implement a variable flight schedule since its customer base is relatively small and the traveling seasons of its customers are roughly predictable. Depending on demand, Allegiant has the flexibility to add or cut flight routes and even postpone flight times in times of low demand. This flexibility, which is unheard of in the larger airlines, has allowed Allegiant to adapt to rough times in the airline industry and has enhanced its durability as a company. For example, when oil prices skyrocketed in 2007 and most of the airline industry teetered near the brink of collapse, Allegiant was able to turn a profit by simply cutting half of its average daily scheduled flights in just two months. Allegiant has mastered the ability to use its flight schedule flexibility to mitigate losses during times of economic hardship and increase profit in times of economic prosperity, an ability that no other major airline has been able to utilize effectively.
On top of these unique strategic advantages, Allegiant recently implemented a potentially significant revenue generator in the form of introducing a $35 carry-on bag fee. This fee will add additional revenue to what is already an extremely impressive balance sheet. Allegiant recently reported first quarter 2012 EPS of $1.12, which beat estimates by $0.13, and revenue of $237.9 million, which beat by $2 million and represents a 23% YOY increase. Moreover, this is Allegiant's 37th consecutive profitable quarter, which is proof of a capable management team that has steered the company through economic and company hardships. For the entire year, Allegiant is expected to report a 60.31% YOY increase in earnings. It should also be noted that Allegiant has a completely manageable Debt/Equity Ratio of 39%.
Overall, Allegiant is one of the best airlines in the industry. Due to its catering to a specific niche of air travel, smart business strategies, excellent financials, and improving conditions for the airline industry, Allegiant definitely has significant upside potential in the future.
Bilifuduo has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.