A Tale of Turbulence

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

Risk will always be a part of investing. One can take large risks by diving deep into emerging markets but balance this by securing a nice stake in a blue-chip company. The common factor? Both types of investments have high profit potential. Temptation lures people to take risks, especially when you see an opportunity every time you look to the skies. The airline industry is talked about often, is a necessity in today's economy, and extremely bullish at the moment. Plenty of money is being made, but the share prices are heavily controlled by speculation. This happens all the time, but US Airways (NYSE: LCC) is the hyper-responder to the media.

I owned US Airways last year, and had I held onto to it, I would have made a bit of profit. Even with the climbing share price, I'm glad I left it behind. It's rising at a ridiculous rate for no reason other than the potential merger with AMR's American Airlines. Numbers are solid, but so is the entire industry, for now.

<table> <tbody> <tr> <td> </td> <td><strong>Net Income</strong> </td> <td><strong>Forward P/E</strong> </td> <td><strong>Free Cash Flow</strong> </td> <td><strong>1 YR Change (%)</strong> </td> </tr> <tr> <td><strong>US Airways</strong> <span class="ticker" data-id="208435">(NYSE: <a href="http://caps.fool.com/Ticker/LCC.aspx">LCC</a>)</span></td> <td> 71</td> <td> 2.5</td> <td>-121 </td> <td>165 </td> </tr> <tr> <td><strong>United Continental</strong> <span class="ticker" data-id="224520">(NYSE: <a href="http://caps.fool.com/Ticker/UAL.aspx">UAL</a>)</span></td> <td> 840</td> <td>5.6 </td> <td> 1,708</td> <td>29.32 </td> </tr> <tr> <td><strong>Delta Air Lines</strong> <span class="ticker" data-id="210158">(NYSE: <a href="http://caps.fool.com/Ticker/DAL.aspx">DAL</a>)</span></td> <td>854 </td> <td>4.2 </td> <td>1,580 </td> <td>59.93 </td> </tr> </tbody> </table>

*Net Income, Forward P/E, and Free Cash Flow in millions of USD. Statistics reported by Morningstar (2011-12).

What is wrong with this picture? We have a company who has outperformed its two largest competitors combined, yet has generated a fraction of the profits and is sitting in the red for the crucial free cash flow. US Airways has gone bankrupt twice and has been growing like wildfire because of a potential merger with a company who is clinging onto life in bankruptcy. The volatility of the stock is enough to keep any Fool awake at night. Even more of a nightmare is the fair value estimate of $8.50.

The entire industry is pitiful when it comes to market returns. For the long term investor, history tells us it's only a matter of time before another bankruptcy occurs. However, the last column looks pretty shiny, so you may be wondering if there is a solid choice among the major airlines. Delta is worth your consideration because they are the clear-cut leader.

Delta has the largest airline hub in the world based in Atlanta. The company is investing in international travel with the near-majority acquisition of Virgin Atlantic. Perhaps more important is their investment in cost-savings by purchasing their own oil refinery, which will counteract exponentially-increasing fuel costs. Statistically, Delta trades cheaply, but as stated previously, so do the other major carriers. Calculate your risk by using factors such as the fair value estimate.

Many investors immediately look for dividend yield before even considering investing. These three players, along with most of the airline industry, have a goose egg in that department. With debt often outweighing cash, shareholders are rarely going to a see a cent. However, as with utilities, cash should be pumped right back into the company for continued maintenance and growth. It becomes a red flag when too much of your investment is filling the pockets of company executives.

The Alternative

People will continue to fly regardless of the health of the airline industry. Planes need manufacturers, and manufacturers need parts. Ignore the recent negative news and keep Boeing (NYSE: BA) and Spirit AeroSystems (NYSE: SPR) on your radar. 

Spirit took a heavy blow after third quarter earnings disappointed because of complications with Boeing's 787 Dreamliner. However, the plane is projected to bring long term profits and there will be future planes that will require design and construction. It has potential to be a "hold forever" stock.

Boeing is a financially healthy, blue-chip company that continues to focus on innovation and diversifies its business between commercial sales and defense contracts. It yields 2.5%, boasts the largest market cap in the industry, and currently trades at less than twelve times forward earnings. This company is the safest long-term investment in the airline industry.

If you're feeling adventurous, airline companies might be your thing. They have enormous profit potential but are always questionable in terms of stability. Focusing on companies behind the scenes may be the best path to a smooth flight.

KyleVaughan has no position in any stocks mentioned. The Motley Fool recommends Spirit AeroSystems Holdings, 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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