The Best Investment Ideas From This 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 recovering from the lows seen in 2007 and 2008. Due to economic improvement, customers are more likely to spend cash. The consumer sentiment index is at multi-year highs. Therefore, it is a good idea to invest in the following airline stocks which present an interesting investment opportunity, or is it?
A look at the airlines
Delta Air Lines (NYSE: DAL) trades with a P/E of 20.2, below its peers’ average of 32.4. According to its most recent quarterly earnings report, the carrier posted flat revenue at $9.7 billion. However, the carrier managed to reduce its operating expenses by 8%, mainly aided by a decline in aircraft fuel related expenses by 21% to $2.6 billion. This resulted in a net income of $685 billion, or $0.81 per share, compared to a net loss of $168 million, or $0.20 per share from the same quarter a year ago.
Investing in the carrier looks promising for the long run. Its growth strategy has been implemented successfully. The carrier has inaugurated a $1.4 billion terminal at the JFK International Airport in New York, and it is remodeling the Terminal 5 at the LAX International Airport in Los Angeles. This should expand its international presence, which is important because long-haul flights bring the best operating margins.
United Continental Holdings (NYSE: UAL) may be another airline to invest in. The company posted record revenue for the second quarter of 2013. Its revenue rose 0.6% to $10 billion on a year-over-year basis, and due to reduced costs of operation, its net income soared 38.3%, from $339 million, or $0.89 per share, to $469 million, or $1.21 per share.
United Continental is showing signs of expansion as well by expanding its Boeing B787 “Dreamliner” fleet to 65. It will be the North America launcher of the B787-10. Further, United Continental opted to convert its existing order of 25 Airbus A350-900 to A350-1000, and it ordered an additional 10 aircraft.
The airline expects delivery of the new aircraft in 2018, and it will be able to modernize its international wide body fleet. The main advantage will be the fuel consumption reduction by these aircraft, which will save the carrier millions of dollars in fuel related expenses.
The carrier could also bring capital appreciation to its investors by instating a share repurchase program. In the last quarter, its free cash flow was expanded from $464 million to $720 million.
Let’s avoid this one
As a smart investor, you should always invest in the companies that have the best fundamentals. While the majority of the airlines are reporting upbeat revenues and net incomes, JetBlue Airways (NASDAQ: JBLU) has not been able to capitalize despite increasing revenue.
JetBlue’s revenue rose 4.5% to $1.3 billion for the three months ending on June 30, 2013. However, due to increases in its costs of operations by 7.5%, mainly due to maintenance and repairs, its operating margin declined from 10.2% to 7.6%. As a result, its net income declined from $52 million, or $0.19 per share, to $36 million, or $0.13 per share.
The airline saw increasing passenger traffic in the quarter. Its revenue passenger miles increased 7.3% to 9.1 billion. To meet the strong demand, its available seat miles were expanded by 7.8% to 10.7 billion. Its load factor declined by 0.4 points to finish at 84.9%.
If the company could not bring higher net income while the passenger traffic is high, imagine when the demand starts to dim. Your portfolio should not be exposed to this airline at the moment.
The carrier is trying to offset lower income by increasing its flights to Latin America. In June, JetBlue inaugurated the routes Fort-Lauderdale, Fla. – San Jose, Costa Rica, and Fort-Lauderdale, Fla. – Medellin, Colombia. Investors should look at coming earnings reports to see load factors in these routes.
Overall, though, you should avoid JetBlue for now.
My Foolish conclusion
Delta Air Lines offers a good investment prospect as it has witnessed a rise in earnings. Further, the carrier is expanding by remodeling the terminal 5 at LAX and by the inauguration of the new terminal at JFK, its international exposure should rise significantly.
United Continental Holdings was also able to capitalize well and increased its net income, and its free cash flow expanded. It is not crazy to think about a share repurchase program in the interim. Further, the carrier is acquiring new long-haul aircraft, which should increase its profit margins in international flights.
JetBlue’s net income declined despite a strong demand for the airline. Therefore, it should be avoided for now.
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