3 Stocks Worth Gaining Exposure to 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 continues to recover, and it is still a great place to invest in. Most carriers are experiencing strong passenger traffic due to overall economic improvements. The consumer confidence index is at multi-year high levels with a reading of 80.1. The airlines mentioned herein offer attractive investment opportunities, and they may be considered for your growth-oriented portfolio.

These airlines will grow!

Alaska Air (NYSE: ALK) reported increasing revenue passenger miles (RPM) in July by 9.2% to 2.5 billion. To meet the increasing passenger traffic, the airline increased its available seat miles (ASM), or revenue-generation seats, by 9.2% to 2.8 billion. Its load factor finished at 88.9%.

The trend of passenger traffic has been upwards for the last year, and there are no reasons why it should change in the near future. Besides my intuition regarding the passenger traffic, there are other reasons why I am very bullish in this airline.

Recently, Alaska Air and Hawai’i BioEnergy signed an agreement for the airline carrier to purchase sustainable fuel beginning in the fall of 2018. This agreement will not only help Hawai’i BioEnergy, but Alaska Air will also benefit. In the future, the U.S. government may give tax breaks or other types of economic incentives for corporations that migrate or partially use biofuels due to environmental concerns.

Furthermore, the company has ratified five-year contracts for Alaska Air pilots and flight attendants. This should dispel any potential risks of strikes. Therefore, operations should continue to run smoothly. I expect more growth from this company, and therefore the stock is rated a Buy.

Expanding airline

Spirit Airlines (NASDAQ: SAVE) is a major airline poised for more growth. It posted outstanding quarterly results in the second quarter of 2013. Its revenue rose by 17.6% to $407 million year-over-year, and its net income rose by 21.6% from $34 million, or $0.48 per share, to $42 million, or $0.58 per share.

Despite the robust growth, I still think there is room for more. The carrier launched several new routes from Dallas, Houston, Philadelphia, and Denver in April and June. These routes may take market share from American Airlines, United Continental, and US Airways, since their main hubs are located in the aforementioned cities. Passenger traffic should be reflected in the coming quarterly earnings release, but I am expecting high load factors in the inaugurated flights.

Also, the carrier is expanding its Airbus fleet. It has added 20 new Airbus A321 aircraft with deliveries scheduled between 2015 and 2017. In addition, it converted 10 of its existing A320 aircraft to A321 with deliveries expected between 2017 and 2018. Only an airline that is confident in its revenue-generation ability would place large aircraft orders. Therefore, the stock is a Buy.

Pilot agreements

Republic Airways (NASDAQ: RJET) is a $600 million by market capitalization regional airline that should bring sizable gains to your investment.

According to its latest quarterly earnings report, the carrier posted a revenue decline of 8.7% to $664 million on a year-over-year basis. However, due to lower costs of operation, its net income rose from $20 million, or $0.40 per share, to $24.6 million, or $0.46 per share for the same period.

The company is confident in its ability to grow in the near future, and its shareholders will benefit. Republic Airways expects to take delivery of 18 Embraer E175 to operate under its American capacity purchase agreement by the end of 2013. Not only will these aircraft help the carrier to generate more revenue, but costs of operation will be reduced since new aircraft are generally more fuel-efficient.

Lastly, the corporation has also reached an agreement with its dispatchers and flight attendants regarding working conditions and salaries for the next five years. The contracts become amendable in June 2018. This should reiterate that the carrier will run efficiently for the next five years.

My two cents

The airline industry is recovering, and it is still the time to gain exposure to the sector as I believe there is room for more growth.

Alaska Air Group is an excellent choice because it is enjoying strong passenger traffic, and its business model is optimal. The carrier is taking the necessary steps to increase its operational margins. The price of the bio jet-fuel should be cheaper than fossil fuels, so its operational costs should decline.

Spirit Airlines is adding new routes and new aircraft. Therefore, revenue should rise, and its profit margin should increase due to the addition of higher fuel-efficient aircraft.

Republic Airways is also adding more aircraft to its fleet, which tells us that the company is confident of having strong passenger traffic in the future. Also, the company has reached an agreement with its dispatchers and flight-attendant unions, so operations should continue to run efficiently.

Therefore, these stocks are a buy now!

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Robinson Roacho has no position in any stocks mentioned. The Motley Fool owns shares of Spirit Airlines. 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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