Imagine an industry that's suffered cumulative losses of more
than $50 billion from 1979 through September 2012.
Not to mention, the sector'sindex has posted a -1.2% annual
return during the past 20 years through 2012, compared with the
S&P 500's 8.2% return during the same time period.
My first thought upon learning about this dismal record was that
this industry must be a dinosaur. Perhaps it was destroyed by the
technology boom or something else not being used much
But nothing could be further from the truth.
This business attracts 2 million paying clients per day on 30,000
different high-cost excursions. In no way is it dying, but why
the awful performance up until lastyear ?
Believe it or not,deregulation hit this formerly high-flying
business in 1978, resulting in price wars that eventually sent
the individual companies intobankruptcy and a series of mergers.
Finally, due to consolidations, bankruptcy reorganizations and
added fees for consumers, this industry is on the upswing.
If you haven't guessed, I'm talking about the airline sector.
There has been tremendousconsolidation in this sector during the
past several years. Examples include
purchasing Northwest in 2008, and
buying AirTran in 2011.
This consolidation has reduced the number of seats available
helping to shift the supply/demand equation positively for the
sector. In 2011, the average U.S. flight experienced an
83%occupancy rate compared with 69% 10 years earlier, according
to trade group Airlines for America.
In addition, bankruptcy seems to have taught the industry a
lesson or two. Rather than continuing to engage in no-win price
wars with one another, carriers have resorted to cost-cutting
measures, such as slashing flights to unprofitable locations to
focus on profitable routes. A variety of new fees, such as for
luggage, seat size and snacks, has also been instituted to
Let's take a close look at my two favorite airlinestocks that
stand toprofit from these new trends.
This originator of discount air travel is a specialist in keeping
costs low and has been in a solid uptrend since mid-December
2012. Its cost-cutting measures have enabled it to earn a
consistentoperating profit in each of the past 39 years.
Southwest uses one type of aircraft, the
737, and flies to point-to-point destinations rather than using a
hub system like its competitors.
After the recent purchase of AirTran's Boeing 717 fleet,
Southwest made the wise decision to lease those planes to Delta
instead of incorporating them into its fleet and departing from
its single-aircraft philosophy.
The airline has a price-to-earnings (P/E ) ratio of just under 23
and amarket cap of more than $9 billion. Thestock had surged more
than 20% this year before hittingresistance in the $13.50
area.Shares have fallen back from the highs but remain in the
value "buy" zone, setting up an ideal technical buy
Widely regarded as the industry leader, Delta agreed to acquire
49% of Virgin Atlantic in December 2012.
In addition, the company announced it would purchase an oil
refinery in an attempt to control fuel costs. Delta expects about
$300 million a year in savings from the move.
The airline specializes in business-class seating, which
generally creates higher revenues than coach passengers. Delta is
looking to provide some business-class passengers with amenities
such as flat-bed seats, HBO TV programming, fresh-cooked meals
and other luxuries.
The company boasts amarket cap of just under $13 billion and a
P/E ratio of just below 13. Shares have soared nearly 23% this
year before hitting resistance at $17. The stock has since fallen
back into the value "buy" zone, setting up an ideal buying
Risks to Consider:
Rising fuel costs are the biggest risk to airline stocks. In
addition, this business's fortunes are highly correlated with the
health of theeconomy . Always use stops and position size
properly when trading.
Action To Take -->
I think Delta and Southwest are great buys right now from a
technical and fundamental perspective. There is little reason to
expect fuel prices to increase, and the economy has plenty
ofupside . My 18-month target prices are $22 for Delta and $20
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