Smaller Airline Stocks Could Take Flight

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Passenger transportation companies with growth strategies can make for attractive investments when demand is trending favorably. Under the auspices of a growing market for short-haul flights, or those between cities without major airports, there is potential for certain entities to thrive. Take a look at just some of the air transport providers that may benefit from such a situation. The primary risk is that of excess expansion, resulting in overcapacity and profitability weakness. But, today’s air carriers are taking measures to mitigate the negative impact of empty seats on their earnings.

One Las Vegas-based carrier, Allegiant Travel Company (NASDAQ: ALGT), enjoyed a good 2012 and is continuing to target underserved geographies. In particular, the carrier is growing its presence in Hawaii. As with most industries, growing pains typically accompany the launch of new products, and the profitability of new routes may be soft at first. Still, once flight demand picks up, airfares should too, and the routes will contribute to profit gains.

Indeed, Allegiant is planning to eliminate unprofitable routes over time, while expanding. It has agreements to purchase new aircraft but appears to be aiming to also improve the utilization of existing equipment, thus boosting efficiency over the long term. Current plans call for 73 aircraft in the fleet at the end of 2015, up from about 64 at this time. It will likely remain focused on domestic leisure destinations.

ALGT shares are at an all-time high. After a brief transition period, I believe profit growth will resume. Moreover, the company has a more stable balance sheet than most industry peers, and this should allow it to finance expansion.

A second air carrier capitalizing on the increased desire by customers to fly point-to-point routes to lesser-served locales is SkyWest (NASDAQ: SKYW). Its core Skywest business flies to and from airports in large and mid-sized cities, while the ExpressJet unit is present at many of the remaining domestic hubs.

One opportunity for SkyWest is the upcoming emergence of American Airlines from bankruptcy and its combination with US Airways. SKYW entered a relationship with American’s American Eagle subsidiary during 2012. Its initial flights out of Los Angeles were well received and it also launched in Dallas.

More importantly, the profitability of ExpressJet is turning around positively. As SkyWest persists with the integration of that segment with its Atlantic Southeast unit, costs should further subside, allowing for improved profitability.

In all, SKYW ought to have revenue and expense factors in its favor this year. The shares are valued for good appreciation potential if the environment (economy and fuel costs) are conducive.

Another airline flying to leisure spots and with a low-cost structure is Spirit Airlines (NASDAQ: SAVE). Spirit thanks a restructured operation, marked by lower-than-average labor expenses per unit, for its wide margins.

Moreover, Spirit is expanding rapidly. In fact, it intends to boost available seat miles (capacity) about 22% this year through the addition of flights on existing routes and connecting cities it already services. Recently entered markets include Phoenix, Denver, Houston, and Minneapolis. These build upon its network of underserved cities as well as the Caribbean and Latin America.

Notably, management intends to lower its cost base even further, partly by way of heightened efficiencies. The margin advantage allows it to price fares below the competition.

SAVE shares seem to be a good pick at this time. The company has no debt. Its relative valuation is low, given that the bottom line will continue to increase sharply this year.

Where to Invest

Thank you for taking interest in the shares of small air carriers. There are two different business models here: Allegiant and Spirit are basically low-cost airlines expanding their route systems, while SkyWest operates under code-sharing arrangements with larger airlines. The advantages over larger airlines are typically a lower cost structure and more liquid balance sheets. However, they also are less diversified in terms of their route networks, meaning they are more susceptible to slowdowns in leisure travel in certain markets. Each of the three stocks mentioned has its own investment merits, while I think SAVE is best positioned for price upside at this time.


dctotal has no position in any stocks mentioned. The Motley Fool owns shares of SPIRIT AIRLINES INC. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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