Airlines are Off to a Great Start in 2012
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Airlines have long been consider a dismal investment opportunity by most investors. High regulations increase already high costs of operation, which in turn reduces any profit there might have been. Profit is scarce in this industry. This makes industry-wide competition pretty fierce. This competition is more often a disservice to the airlines, as it shrinks profits even further. I worked for a regional airline once. Due to competition we did not make a single dime on flights into our hub. We actually lost money on every flight. But we had to keep ourselves in the competition, hoping that the connecting flights they took from the hub would make up for the initial loss. Maybe some airlines are beginning to figure out how to make a profit.
Both Spirit Airlines (NASDAQ: SAVE) and WestJet Airlines posted an increase in Q1 2012 net income on Tuesday. Spirit Airlines saw their net income triple in the first quarter and revenue is up 30%. Also, shares outstanding nearly tripled to $72.5 million. Perhaps this is a sign of investor optimism or increased confidence in an industry with a disconcerting investment reputation. Canadian WestJet Airlines posted an increase in net income of 42%.
Delta Airlines (NYSE: DAL) also has some good news. They recently agreed to buy a Conoco-Phillips refinery. The purchase is being made through wholly owned subsidiary Monroe Energy. DAL finished Monday with a slight increase on this news. This purchase could go a long way to decreasing Delta's costs of operation, a constant headache for airlines. Fuel costs are one of the highest expenses in the industry. Delta is also great at branding itself as the executive's airline of choice. The upscale service and added value they provide goes a long way for the business traveler who has seen the worst but expects the best.
Then, of course, there is Southwest Airlines (NYSE: LUV), a long-time favorite in the industry. This airline has set the precedent for keeping costs of operations low partly by only operating one model of airplane, which keeps ground equipment and training costs down. At one point they even hedged their fuel contracts, which kept them ahead of the competition for years. Compared to the transportation industries they may fall to the bottom, especially to when it comes to dividend yield, but when it comes to passenger airlines they are the king of the skies. Also, Southwest has one of the lowest employee turnover rates in the industry.
There are some airlines that are off to a great start in 2012. Passenger airlines will still, understandably, scare away most investors, but there are still some standouts that look like they are making all the right moves. Delta is making great strides in vertical diversification, and Southwest is working hard to maintain its standing. Delta plays to the seasoned traveler and Southwest plays to the general public. But they are both making great strides in keeping costs of operations down. Operating costs for airlines are higher than for most other industries. There are some that are handling it well. Passenger airlines are definitely something to keep your eye on in the coming quarters.
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