Can These Airline Stocks Lift Your Portfolio?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In June, the International Air Transport Association (IATA) forecast a 67% increase in profits for the global airline industry in 2013 to $12.7 billion. Passenger traffic will be up more than 5%, the IATA said, and airline occupancy will reach record levels of 80.3%, up more than 1% from last year.
Airlines coped with the rough times of the last few years by aggressively cutting costs and restructuring -- either through mergers or, unfortunately in some cases, bankruptcy. But it looks like excellent flying weather this year, with the IATA predicting North American air carriers earning a profit margin of 4.2%.
Let's take a look at three different airlines and see if these improving industry conditions are benefiting all of them.
The plucky regional carrier
Regional carriers like SkyWest (NASDAQ: SKYW) may not be as flashy as the large airlines, but they get the job done very efficiently -- and as we will see in the case of this company, profitably.
SkyWest serves cities in the U.S., Canada, the Caribbean and Mexico. The airline makes around 4,100 departures each day with 760 regional aircraft -- Canadair regional jets and turboprops. They operate through SkyWest Airlines based in St. George, Utah and ExpressJet Airlines in Atlanta.
SkyWest Airlines has contractual agreements to operate flights for Alaska Airlines, and provides flights under the brand names United Express, Delta Connection, American Eagle and US Airways Express under agreements with United, Delta Air Lines (NYSE: DAL), American Airlines and US Airways. ExpressJet operates has flights under the brand names United Express, Delta Connection and American Eagle under contractual agreements with United, Delta and American Airlines.
SkyWest flights are of the short-hop variety. The average passenger trip length is 524 miles.
In its second-quarter results, SkyWest reported operating income of $50.6, million compared to $46.8 million the same period last year. The company's fleet has grown by 35 aircraft in the last year. As a result of lower interest expenses, pretax income was up even more percentage-wise--nearly 18%, to $33.7 million.
The company served 5.2% more passengers during the quarter than in 2012's second quarter, but revenue per available seat mile declined. SkyWest's balance sheet was solid at quarter's end. The company had $665.6 million in cash and marketable securities on hand.
The new kid in the skies alters its strategic flight plan
JetBlue Airways (NASDAQ: JBLU), which calls itself "New York's Hometown Airline," opened for business only 13 years ago and now serves 79 cities with 850 flights departing each day.
Their original niche was as a low-fare carrier with superior service. For example, it offers seats -- leather seats -- with more legroom than other carriers' coach-class service, and provides DirecTV on seat-back screens.
Recently, JetBlue announced innovations designed to entice more upscale leisure travelers to fly with the company. In 2014, it will begin offering seats that can be folded down into lie-flat beds on certain transcontinental routes and be the first airline to offer private little "suites" with doors. The company saw the high profit margin on premium cross-country seats from other airlines and wants to capture some of this rich business for itself. But with a JetBlue twist: it intends to charge less for these premium seats than competitors do.
The company's second-quarter results revealed some financial turbulence. Investors might want to keep their seat belts on--operating income was $102 million, down substantially from the $130 million the company earned in the comparable quarter last year. In operating-margin terms, the decline was even more stark: 7.6% this year compared to over 10% last year.
Two key airline industry metrics were also down. PRASM -- passenger revenue per available seat mile -- for the second quarter decreased 3.3% compared to the comparable quarter of 2012; and RASM -- operating revenue per available seat mile -- was down 3.1% year-over-year.
On a happier note, JetBlue ended the second quarter with a nice stockpile of about $867 million in unrestricted cash and short-term investments.
Most admirable profits
Delta is one of the largest airlines in the world, serving 160 million customers annually through flights to 327 destinations in 700 countries. Delta was named the world's most admired airline in Fortune magazine's rankings. The company was also one of the winners of the Workplace Excellence Award given by The Families and Work Institute and the Society for Human Resource Management. Do all of these good deeds translate into great profits?
Yes. The second quarter of 2013 was spectacular for Delta in terms of profitability, with net profit reaching a record $844 million, which was $258 million higher than the same quarter last year. What is particularly impressive about this is that the results came with the air-travel industry still in recovery mode. Delta said traffic increased only 0.5% for the quarter and PRASM was basically unchanged. It did release an update of results for July, which showed PRASM rising 3%.
This company churned out more than $1 billion in free cash flow this year through the end of June. It announced its intentions to return more than $1 billion to shareholders over the next three years through stock buybacks of $500 million and annual dividend payouts of $200 million.
What we learned
JetBlue gets points for innovation and trying to expand its customer base to upscale travelers. But let's see if this brings in more of the high-margin business it is hoping for. SkyWest, the regional carrier that was able to improve its profitability when industry conditions were still unsettled, gets my vote as a good stock to keep an eye on. But the winner has to be Delta. Terrific results being delivered by a great company. Just keep in mind Delta's stock is up over 100% in the last year.
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Brian Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!