The Best Way to Invest in 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.

The airline industry is rebounding from the lows of 2008. Stronger demand is observed across the board. In addition, economic conditions are improving globally. The latest consumer sentiment reading was at a five-year high. In order for investors to gain exposure to the airline industry, we should consider these companies which present a great investment prospectus.

Valuation

U.S. Airways (NYSE: LCC) trades with a price-to-earnings ratio of 5.3 compared to the industry’s average of 27.0. Its revenue rose by 6% to $3.4 billion, and its net income rose 43% to $69 million, or $0.26 per share, in the last quarter.

Delta Air Lines (NYSE: DAL) trades with a P/E of 17.6, also below the industry’s average. Its revenue remained unchanged at $8.5 billion, but its net income shrunk from $124 million, or $0.15 per share, to $7 million, or $0.01 per share, in the most recent period.

Spirit Airlines (NASDAQ: SAVE) is slightly higher in terms of valuation compared to the other two airlines. It trades with a P/E of 19.6, but it is still trading below the industry average. In the last quarter, revenue rose by 20% to $370 million, and net income rose by 30% to $31 million, or $0.42 per share.

A low P/E and increasing sales are appealing metrics for the value-oriented investor. Further, the carriers should continue to grow for the following reasons:

An airline with an increasing presence in the international market

US Airways is in the process of merging with American Airlines. Thus, the company will have the greatest presence internationally. Investors should know that long-haul flights have the highest operational margin because airlines use the most fuel-efficient aircraft. The company has announced the board of directors for the new American Airlines.

On other fronts, the company reported a blowout in terms of passenger traffic in May. In the domestic sector, revenue passenger miles (RPMs) rose by 5.6% to 4.2 billion. RPMs for the Atlantic region increased by 8% to 1.1 billion. The carrier has added 3.9% more available seat miles to meet the strong demand. Its load factor increased by 1.7%.

There is strong passenger traffic at US Airways, and the company is meeting the demand by adding more seat miles through financing of new aircraft. Overall, the carrier will continue to grow because there is a strong demand, and the company is managing its expansion well.

This airline is also gaining international exposure

Delta Air Lines has inaugurated a $1.4 billion international terminal at the JFK International Airport. In addition, the carrier is penetrating the Brazilian market through a partnership with GOL Linhas Aereas to operate the route from Atlanta to Sao Paulo. However, I would also expect the carrier to pursue the induction of routes from JFK to Brazilian destinations.

Further, the company is remodeling its terminal three at the JFK International Airport to bring a better traveling experience to its customers. With terminals three and four, the company will expand operations between the JFK airport and international destinations.

Finally, the company has acquired 49% of the Virgin Atlantic Airways, which should expand its operations in the Atlantic region.

Overall, the company also observed stronger revenue passenger miles. Its RPMs increased by 1.5% to 16.7 billion. Also, the company is tackling stronger demand by the addition of available seat miles. Its ASM increased by 0.7%. Consequently, its load factor increased by 0.7%.

Overall, Delta Air Lines is expanding through remodeling terminals three and four at JFK International Airport. Further, the company is meeting stronger demand by the addition of seat miles. Hence, the company is well-positioned for further growth.

The regional airline that is growing impressively

Spirit Airlines is also showing growth signals. The company has ordered 20 additional Airbus A321 aircraft to meet its increasing passenger traffic. These aircraft are in addition to the 96 aircraft not yet delivered under Spirit’s orders, but they will be delivered between 2015 and 2017.

Also, the carrier has opted to convert 10 A320s to A321s, aircraft that are scheduled to be delivered between 2017 and 2018. The company should cut its operation costs with the introduction of these more fuel-efficient aircraft.

In addition, the company is confident of its revenue-generation ability. The carrier recently opened new flight attendant positions. Two job fairs were hosted in Chicago in May.

Finally, Spirit posted an outstanding traffic report in May. Its RPM increased by 28% to 1.0 billion, and its ASM increased by 24% to 1.1 billion. Finally, its load factor increased to 86.9%.

In conclusion, Spirit Airlines has experienced a significant rise in passenger traffic, but the company is in the best position to provide the service with the inclusion of new aircraft. Hence, its revenue should continue to grow.

The Foolish conclusion

The airline industry has rebounded sharply by a stronger passenger traffic. These airlines should continue to provide investors with capital appreciation because they are implementing brilliant expansion strategies. Some of them have merged with other airlines, others have increased international and domestic exposure through the remodeling of terminals or the addition of new aircraft. Therefore, I would recommend buying these stocks as a basket to gain exposure to this glowing industry.

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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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