​A Stock That’s Flying Safe

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are some industries that are inherently volatile. Many are at the mercy of macro-economic climates, and this particular one is more dependent than almost any other sector. The airline industry is noted for its volatility, thanks to intense competition as different companies battle to gain market share (although not everyone thinks so, I will elaborate later in this article).

Sandy hasn’t done too much for most airline stocks, and earnings are naturally expected to take a hit. The hurricane caused cancellation of nearly 20,000 flights on the east coast, according to flight tracking services. Some passengers may re-schedule their flights, but a far greater number are expected to cancel their reservations and seek refunds. Most airlines are going to announce the impact of Sandy in the coming week. Delta Air Lines (NYSE: DAL) said on Friday that the storm cost it $45 million in revenue and $20 million in profit. The company had to cancel more than 3500 flights.

The Atlanta-based airline reported net income of $1.05 billion, or $1.23 per share for the third quarter, much higher than the $549 million and $0.65 per share in the same quarter of the previous year. Excluding special items, Delta's net income for the quarter was $768 million, or $0.90 per share, compared to $765 million, or $0.91 per share in the same quarter a year ago. The airline has a good share in the corporate sector, and in its conference call mentioned that they expect that share to remain. The company noted that the corporate travel market was stable, and that they hadn’t seen any worrisome trends as of now.

According to Delta’s President, Ed Bastian, the company also performed poorly in the Asian market because of a lot of capacity in that sector. The revenue of 3% from South America is less than previous quarters, but this was attributed to capacity growth in the market as a whole and not from a drop in demand. Consolidated Passenger Revenue per Available Seat Mile, or PRASM, considered the best measure of revenue for airlines, grew 3% to $13.96 from the prior-year quarter, while operating Cost per Available Seat Mile or CASM, declined 2% to $13.83 from the year-ago quarter. The company expects the operating margin to grow from 4% to 6% in the next quarter.

US Airways (NYSE: LCC) is also a company that seems optimistic about the industry. The company reported pro-forma EPS of $0.98, beating consensus estimates by 6 cents, on revenues of $3.533 billion which was in line with estimates. US Airways President Scott Kirby said that leisure demand is a pretty good indicator of the state of the industry. The minute leisure demand decreases will be the alarm bell. This is because in an uncertain economic climate, you’d probably be worried for you’re job and if you’re in that position, you’re unlikely to travel for leisure. Kirby’s remarks regarding leisure travel are true for 2012 as numbers from sites such as Expedia and Priceline prove. Kirby is also of the belief that there is more rationality in the industry as a whole and the days of sacrificing profitability for market share are over.

While these numbers prove to point to a fairly rosy future ahead, there is a possibility of looking elsewhere and perhaps picking up a fairly good companies in the same industry but in a different location. Copa Holdings (NYSE: CPA) is the parent company of Panamanian carrier Copa Airlines and Columbian carrier Copa Airlines Colombo. The company’s operating region makes it a fairly profitable one. Most of its flights are to North, Central and South America and the Caribbean. The growth in this region is faster because the market isn’t saturated like it is in the States. The company is popular with business travelers because they can treat connecting passengers like they're on a domestic flight, even if they're passing through one or more countries. This means less time going through customs and other such procedures so long as the passenger doesn’t step out of the airport. If you’re planning on being a little adventurous, I may recommend holding on to the stock for a few years, until 2018 when two huge sporting events happen in Brazil – the Olympics and the Soccer World Cup. The company’s P/E is 13.75 which is fairly good and now might be a good time to pick it up.


ceciljohn2002 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.

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