3 Ways to Play the Airline Industry

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

Airline stocks have been in favor so far this year after being slashed in the 2000s. Airlines have experienced increasing passenger traffic and lower costs of operations due to more fuel-efficient aircraft. To take profit from the improving airline market, a basket of companies in different industries may be bought. This article presents three stocks that offer an interesting investment prospectus.

The airline

Most of the stage is shared between US Airways, Delta Air Lines, and United Continental Holdings. However, Alaska Air Group (NYSE: ALK) may offer capital appreciation to its investors. The airline has an aggressive expansion strategy that has yielded substantial results. From a valuation standpoint, the company trades with a price-to-earnings ratio of 12.6, compared to the industry average of 31.9. It is not uncommon to see airlines submerged in debt, but Alaska Air Group has a lower-than-average debt-to-earnings ratio at 0.6.

According to the latest quarterly earnings report, revenue increased by 9% to $1.1 billion, but net earnings declined 10% to $37 million. Overall, the company had an outstanding quarter because its revenue passenger miles (RPM) increased 9% to 6.7 billion. Further, even though its available seat miles (ASM) increased 8.7% to 7.9 billion, its load factor increased by 0.2%.

The company still offers potential for growth. It was awarded the highest customer satisfaction award from JD Power, and there is a positive correlation between customer satisfaction and loyalty, passenger traffic, and stock price. Also, the carrier has reached a tentative agreement with the 1,480 pilots that fly its aircraft. The possibility of a strike, which is particularly harmful to airlines, should be low and its costs of operation will not increase significantly.

The company shows growth potential by the inauguration of several routes. On Aug. 26, the carrier will begin to fly daily from Portland, Ore. to Atlanta, and on Sept. 16, the route Portland, Ore. to Dallas will be covered.

On Dec. 18 and Dec. 19, the carrier will commence flights from Anchorage, Alaska to Phoenix and Las Vegas. The Anchorage, Alaska to Las Vegas route will be beneficial because the company will not have to share revenue with other airlines in the alliance due to connecting flights.

Finally, the carrier started the routes of San Diego to Kauai, Hawaii and Portland, Ore. to Fairbanks, Alaska on June 7 and June 8. The revenue from these routes should be reflected on the third quarter of 2013.

Overall, I believe that Alaska Airlines still has much potential to offer to its investors in the long term.

Another way to play the rising airline industry

It is not uncommon for travelers to rent automobiles at destination airports. Car- rental companies should see rising demand for car rentals. Avis Budget Group (NASDAQ: CAR) provides car and truck rentals and ancillary services to businesses and consumers globally.

From a valuation point of view, the company trades with a P/E of 14.6, while the industry’s average is 24.4. One thing that may be troublesome is the large debt its balance sheet carriers, with a debt/equity ratio of 15.5. The reason for the large debt is the modernization of its fleet, and car rentals undertake this debt quite often. According to its most recent quarterly report, revenue increased 4% to $1.7 billion. However, its net income resulted in $46 million loss.

On the bright side, the company should continue to grow. Revenue from rentals in North America rose 6%. Further, the company has completed the acquisition of Zipcar, the world’s leading car-sharing network. Further, the company should decrease its debt with its program “Ultimate Test Driving.”

Customers may now purchase used vehicles at a fair price from Avis. The vehicle trading should be boosted now that the company has announced that the program will accept trade-ins. Avis will take trade-ins at a considerably cheap rates. Not only will it profit from the used car it sells to the customer, but also the revenue from the trade-in car will be substantial once the vehicle is sold. Auto dealers also accept trade-in vehicles because their revenue increases by acquiring the vehicle from the customer at undervalued prices, and later selling it for a huge profit.

Finally, the company has a partnership with Spirit Airlines (NASDAQ: SAVE), where members of “Free Spirit” can save money when they rent from Avis Car and Budget Car Rental. Plus, they will get additional miles in their accounts. This partnership will be significant in coming quarters.

The carrier-car rental partnership is a win-win situation.

Spirit Airlines is a regional carrier that has expanded remarkably. The company provides travel opportunities mainly in and from South Florida, the Caribbean, and Latin America. The airline trades with a P/E of 18.9, while the industry’s average is 31.9. What’s more is that its balance sheet carries no debt. Highlights from its most recent earnings report include an outstanding 22% increase in revenue to $370 million. Its net income jumped 30% to $30 million.

Although its growth has been stunning, I believe the company is still implementing an aggressive expansion strategy. The company has inaugurated nine new routes from Dallas/Fort Worth, Texas, Philadelphia, Baltimore and Houston on April 25. In addition, four more routes will start in June 13 and June 14 from Dallas/Fort Worth, Texas and Houston.

The company should take a significant market share from American Airlines and United Continental. Although I do not believe that its revenue will be significantly higher for the second quarter of 2013, investors should look into the earnings report for the third quarter to observe the impact of these new routes.

In addition, the company has added four Airbus aircraft, and five more are scheduled to be delivered in 2013. Also, the partnership with Avis should be beneficial to the carrier because customers will be loyal to both companies to take full advantage of the partnership. Lastly, the company’s ability for revenue-generation is great. It hosted job fairs for new flight attendants jobs in Las Vegas and Dallas/Fort Worth.

The conclusion

The airline industry is improving, and these companies offer an interesting investment prospectus. They have a solid past, and their future looks promising. For these reasons, long positions are highly recommended.

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Robinson Roacho 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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