Flying Where the Growth Is: Emerging Markets Airlines

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Many investors are searching for growth in emerging markets as the economies of developed markets continue in a pattern of slow growth. Part of the emerging markets bull thesis is a growth in the number of middle class consumers who will buy more consumer goods thereby boosting economic output. There are many ways to play growth in the middle class but this article will primarily focus on the potential for air travel.

Growing Panamanian carrier

Airline stocks in the U.S. have seen an impressive rally over the last several months before slowing down more recently. Much of the same can be said of Copa Holdings SA (NYSE: CPA), which operates primarily in South and Central America. Shares of Copa have about doubled since the beginning of 2012 and have more than quintupled since 2009. This share price growth comes on the back of strong earnings growth as earnings per share rose from $4.82 in 2010 to $7.35 for 2012. And estimates from project continued earnings growth with earnings hitting $12.60 per share for 2015.

Copa has been on a wave of expansion in the past several years. While it began operations mostly as a domestic carrier, Copa is now expanding its fleet with new jets giving it the ability to add capacity on international routes while using modern, more efficient aircraft to reduce operating costs.

Troubled Brazilian carrier

Shares in Brazilian companies have had a rough year seeing as the Ibovespa Index (based on select companies on the Sao Paulo Stock Exchange) has fallen from over 60,000 at the beginning of 2013 to just above 45,000 today. The most recent drop in the Ibovespa Index has been partially influenced by the civil unrest in Brazil. Investors tend to dislike uncertainty and civil unrest brings plenty of this.

In the midst of this, shares of Brazilian airline Gol Linhas Aereas Inteligentes (NYSE: GOL) are struggling along with much of the Brazilian stock market. But Gol is being hit particularly hard by a drop in the Brazilian real causing its U.S. dollar-based obligations to increase. However, Gol is attempting a turnaround fed by cost cutting and better management of capacity. While the analyst community is still generally bullish on Gol, this airline represents a greater financial risk than Copa Holdings, and investors should keep this in mind if they choose to invest in Gol.

U.S. based emerging markets

It doesn’t sound right that an American airline would have emerging markets as a core part of their business model over the next several years but Hawaiian Airlines, owned by parent company Hawaiian Holdings (NASDAQ: HA), is set to make east Asia a core part of its network. With a strong position in the Hawaiian market, the proximity of Hawaii in relation to the markets of east Asia makes Hawaii a prime spot for tourists from emerging markets. At least this is what Hawaiian hopes for.

The airline is set to begin long awaited expansion into China as analysts are saying Hawaiian could begin to be pressured in the American west coast market. However, Hawaiian will likely continue expansion in the U.S. making for a combination of expansion on both sides of the Pacific, giving investors an airline that’s a hybrid between emerging and developed markets.

Airline danger zone

Airlines are often considered higher risk than the average investments, and emerging markets are considered to have added risk as well when compared to developed markets. But emerging markets airlines are not necessarily a simple addition of both factors. All U.S.-based legacy carriers have declared bankruptcy at one time or another but among the three airlines mentioned above, only Hawaiian has declared bankruptcy in its history. Although, investors do need to keep both the risks of airlines and of foreign markets in mind when investing in emerging markets airlines, be they foreign or Hawaii-based.

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Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. 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!

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