Take Advantage of the Recovering Airline Industry Through These Companies

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

The airline industry continues to experience strong demand.  For instance, JetBlue Airways (NASDAQ: JBLU) has reported strong traffic in May. Even though the company has under-performed its peers so far this year, there is still plenty of room for growth. Every growth-oriented portfolio should be exposed to the airline industry, and JetBlue offers an excellent investment opportunity to do it.

The blue jet

JetBlue trades with a P/E of 18.9, compared to the industry’s average of 29.2. Its balance sheet does not carry a sizable debt in comparison to the industry’s average. Its debt-to-equity ratio is 1.2. Further, its revenue for the three months ending in March 2013 increased 8% to approximately $1.3 billion. However, due to higher costs of operation, its net income declined more than 50% from $30 million, or $0.09 per share, to $14 million, or $0.05 per share.

Jet Blue should continue to grow in the future. According to the traffic report for May, the company’s revenue passenger miles (RPM) increased 9.4% to nearly 3.0 billion. Its available seat miles (ASM) increased by 9.0% to 3.5 billion, and its load factor remained statistically unchanged. This is great news for the carrier. Not only did it expand the seats available for purchase, but all of those seats produced revenue. Lastly, the number of departures increased 8.3% to 23,408. The growth this airline shows is outstanding.

The presence of the carrier in Latin America and the Caribbean is expanding. A new route between Fort Lauderdale, FL. and Medellin, Colombia was inaugurated. Also, ticket sales for routes between Ft. Lauderdale and Port-au-Prince, and JFK and Port-au-Prince have gone on sale. The company is launching a daily service starting in December. JetBlue is consolidating its presence in Latin America, and its revenue should soar as a result.

Lastly, the company has announced an interesting rewards plan that is likely to bring customers. The exciting feature about this program is that the miles accumulated will never expire. Other airlines have expiration dates on the reward miles, so club members either use them or lose them. I believe this strategy is well designed, and it shall bring customers from competing airlines.

There is growth in this airline

Spirit Airlines (NASDAQ: SAVE) is another airline that flies to Latin America and the Caribbean from the United States. The company trades with a P/E of 0.5, below the industry’s average of 27.2. What’s amazing is that this airline carries no debt in its balance sheet. This is uncommon, as most airlines are submerged in debt. This carrier has shown outstanding growth. It posted net income of $31 million for the first quarter of 2013, up 34% from a year ago. Its revenue increased by 20% to $370 million.

The company is confident in its revenue-generation ability. Spirit Airlines has entered an agreement with Airbus to deliver 20 more A320 aircraft;  this on top of the 96 aircraft that have not yet been delivered but that are scheduled to start operations between 2015 and 2017. The company will reduce its costs of operation by operating more fuel-efficient aircraft. Also, the company has opted to convert 10 of its existing A320 aircraft to A321, and the aircraft will be delivered in 2017 and 2018.

Several new routes were recently inaugurated from the Dallas/Fort Worth, Texas International Airport to Cancun and Los Cabos, Mexico, Los Angeles and Oakland, Calif. and Pittsburgh. Revenue from these routes should be reflected in the third quarter of 2013, and investors should analyze how well were these routes are received by customers. However, I believe that by Spirit Airlines being a low-cost carrier, the load factor on these routes should be high.

Overall, Spirit Airlines offers an attractive investment opportunity, and it is a great stock for investors to gain exposure to the airline industry.

The aircraft manufacturer

It is interesting that several U.S. carriers are opting toward Airbus instead of Boeing (NYSE: BA) to fulfill their aircraft needs.

As far as single-aisle aircraft are concerned, Boeing offers its B737 variant. Apparently the B757 and B767 were not very successful and they are being replaced in the industry by Airbus A320s. JetBlue flies only Airbus A320 models. Spirit Airlines operates 29 A319s and 19 A320s. However, 116 more A320s have already been ordered.

In addition, US Airways is retiring its fleet of B737, B757, and B767 and these aircraft are to be replaced by A321s. US Airways operates A330s and will operate A350s for its long haul flights.

The question here is: Is investing in Boeing a good strategy in these times?

The fact that U.S. airlines are leaning toward Airbus instead of Boeing worries me alot! The company trades with a P/E of 18.6, below the industry’s average of 17.0. Its revenue shrunk in the first quarter of 2013 by 2% to $18.9 billion. Its net income, however, increased 19% to $1.1 billion. In addition, its free cash inflow declined substantially from $413 million to $3 million. Although I believe that the dividend offer is still not in danger, investors should continue to watch for the free cash inflow levels in the coming quarters.

On the positive side of things for Boeing, the company hiked its dividend payment in December 2012 by 10% to $0.45 per share, and it also resumed its $3.6 billion share-repurchase program. This is likely to bring capital appreciation to its shareholders.

Furthermore, the company has resolved the issues regarding the “Dreamliner” B787 aircraft, and I expect orders for the aircraft to rise. However, the issue with low demand for B737 remains. This is the reason why I would rank Boeing as “Hold." I believe its revenue will continue to fall as long as the demand for the B737 is weak. The sales of its B787 will offset the declining revenue, but I do not expect it to be significant.

In brief…

JetBlue Airways and Spirit Airlines should continue to experience strong demand for their routes, and their revenue is likely to continue to ascend. Also, the airlines are expanding significantly by ordering new aircraft and inaugurating new routes. I believe investors will have a pleasant investment experience by going long in these companies. These airlines prefer Airbus aircraft as opposed to Boeing, and this is likely to impact the aircraft manufacturer in the long run. Thus, investors should hold their thoughts on Boeing until the next quarterly earnings report is posted and look for revenue and free cash flow growth.

Boeing operates as a major player in a multi-trillion-dollar market in which the opportunities and responsibilities are absolutely massive. However, emerging competitors and the company's execution problems have investors wondering whether Boeing will live up to its shareholder responsibilities. The Fool's premium research report on the company provides investors with the must-know issues surrounding Boeing. They'll be updating the report as key news hits, so don't miss out — simply click here now to claim your copy today.


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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