Latin American Expansion Is Key for the Growth of These Airlines
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The airline industry has slowly recovered from the blow it received in 2007 and 2008. This has been aided in part by a global economic recovery. Further, the consumer sentiment’s latest reading was at multi-year highs. Passenger traffic has been strong in the recent past, and it is not likely to dim in the near future. As a result, the companies mentioned herein should be considered for long positions to gain exposure to the industry.
Good metrics are what we want!
Delta Air Lines (NYSE: DAL) and U.S. Airways (NYSE: LCC) are two major airlines in the United States that also have a worldwide presence. Both companies trade with price-to-earnings ratios lower than the industry’s average of 31.6; Delta has a 18.5 ratio, while U.S. Airways has a 5.5. According to their most recent quarterly earnings reports, revenues for Delta remained unchanged at $8.5 billion, while U.S. Airways’ revenues increased by 10% to $3.4 billion. Both airlines also offer an excellent investment prospectus.
A look at Delta
Delta plans to bring capital appreciation to its investors through a hefty share repurchase program worth $1 billion over the next three years. Furthermore, the company has initiated a dividend offer of $0.06 per share, or 1.28%. The company should not have any issues paying its obligations due to healthy a balance sheet.
The company ended the last quarter with $1.0 billion cash from operations, up from $831 billion. Its free cash flow, although contracted slightly, was $357 million compared to $424 million a year ago. Investors should look for continuing free cash inflow and should expect dividend hikes as well.
So how is the company going to bring higher revenues in the near future?
The company is expanding operations internationally. The recent grand opening of Terminal 4 at the John F. Kennedy airport in New York will give the company a stronger presence in international markets. This is important because long-haul flights have better operation margins than short-haul since newer and more fuel-efficient aircraft are generally used for such operations.
The carrier has also partnered with GOL Linhas Aereas to increase its exposure to the Brazilian market, positioning it to take advantage of the 2014 Soccer World Cup. The company has also been authorized to operate the Atlanta – Sao Paulo route, which is the most important economic center in South America.
Delta has opened the first technical operations line maintenance in Sao Paulo. The exposure of the airline to the Brazilian market may bring higher revenues in the interim. The company's stock definitely offers an interesting investment prospectus.
A look at U.S. Airways
U.S. Airways may be another excellent choice to gain exposure to the industry. The company may be regarded as a value play, but there is also potential for growth.
Its shareholders have authorized an American Airlines merger, and the carrier has already elected the Board of Directors for the new American Airlines. This merger positions U.S. Airways as the largest international airline in the world, which is certainly nothing to sneeze at.
There is a general trend for airlines to expand into Latin America, and U.S. Airways is no exception. The carrier was tentatively awarded permanent authority to operate the Charlotte – Sao Paulo route. As with Delta, this airline is seeing great opportunities in the Brazilian markets.
U.S. Airways is in a good position to bring value to its investors. The merger with American Airlines may bring higher revenues due to a higher international exposure. The carrier is also expanding with new routes to Brazil. As a result, U.S. Airways may be a good choice to enter the sector.
A regional airline with huge potential
JetBlue (NASDAQ: JBLU) is a regional airline that may fit well into a growth-oriented portfolio. The company trades with a price-to-earnings ratio of 19.3, as compared to the industry’s average of 32.1. According to its most recent quarterly earnings report, revenues rose by 7% to $1.29 billion though its net income shrunk from $30 million to $14 million. Its free cash flow expanded by 20% to $122 million.
The company is following in the footsteps of major airlines by inaugurating new routes to Latin America. In June, JetBlue started flying from Fort Lauderdale to San Jose, Costa Rica, and also from Fort Lauderdale to Medellin, Colombia. Investors should look for increasing revenues in the fourth quarter earnings report.
The carrier has strong passenger traffic. Its revenue passenger miles (RPM) rose by 7.8% in June to 3.13 billion. To meet an increasing demand, the carrier is adding available seat miles (ASM), meaning that it is increasing its revenue-generation ability. Its ASM increased by 8% to 3.6 billion while its load factor remained unchanged at 85.9%.
Overall, JetBlue offers an attractive opportunity for investment because the passenger demand is strong and it is creating new routes to Latin America. This could make it a solid holding in growth portfolios.
The foolish conclusion is…
The airline industry is booming, and several airlines have strong passenger traffic. Delta Air Lines, U.S. Airways and JetBlue are expanding substantially by opening new routes, particularly to Latin America. As a result, I would highly recommend having these stocks to profit from the airline industry.
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Robinson Roacho 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!