Investing in airline industry stocks is a challenge.
Airline companies generally have low profit margins, high debt
loads and cyclical performance. The industry is very
competitive in the U.S. and overseas, as too many airlines compete
for too few travelers.
After consumers and businesses reined in travel spending in 2008
and 2009, travelers are flying once again, which is good news for
the airlines. Revenues at airlines in the U.S. are forecast to
advance a whopping 17% in 2010, with another healthy increase in
2011. Profits of $3 billion are forecast for 2010 compared to an
ugly deficit of $5 billion in 2009.
Airline stocks tend to fluctuate with the health of the economy and
the swings in fuel prices. The resulting volatility and high debt
levels cause most of the airline stocks to become risky selections.
Yet, the wide fluctuations in the prices of airline stocks provide
the nimble investor with plenty of opportunities.
The airline industry is poised for a return to profitability this
year. Carriers are reporting better summer booking trends, which
reflect an economy that is beginning to move slowly forward.
Corporate as well as consumer flying is on the rise, a trend that
should continue during the next several quarters. Major carriers
are neither planning increases in service nor adding jets to their
fleets. Productivity and planeloads are improving, and fuel prices
have become less volatile and remain at reasonable levels.
Smaller, more-efficient airlines continue to gain market share from
the largest airlines. Low-cost airlines, such as Southwest, JetBlue
and Alaska Air, are forcing ticket prices to remain relatively low.
Many of the major airlines have merged during the past decade to
save costs and become more profitable. UAL, parent of United
Airlines, and Continental are likely to merge soon.
Alaska Air Group (
, based in Seattle, operates Alaska Airlines, which contributes 81%
of the company's total revenues, and Horizon Air Industries, which
makes up the other 19%. The Alaska division is a major
airline serving destinations along the Pacific Coast, Alaska,
Hawaii, Canada and Mexico.
The Horizon Air division is a regional carrier, which complements
Alaska Air with connecting flights to smaller cities using smaller,
more efficient planes.
J.D. Power rated Alaska Air the "Highest in Customer Satisfaction"
for the third year in a row in 2010. In addition, the company has
held the top spot for on-time performance for 13 of the last 14
Alaska Air has completed its transition to an all-Boeing fleet
composed of 115 jets with an average age of 7.5 years. Horizon is
in the process of transitioning to an all-Bombardier Q400 turboprop
airplane fleet with a current average age of 5.8 years. Alaska Air
recently signed multi-year contracts with its pilots, flight
attendants, and mechanics.
Revenues increased 16% and EPS tripled during the quarter ended
6/30/10 boosted by fuller planes, lower costs, higher ticket prices
and flights to new cities. We expect 25% EPS growth during the next
12 months as the company expands its service to Hawaii and Mexico
and closes less profitable routes. At 8.5 times our 12-month
forward earnings per share estimate of 5.85, ALK shares are a real
bargain at the current price.
Another smaller airline that we follow,
, is one of the largest commuter airlines. The company provides
short-haul service to 218 cities in the U.S., Canada, Mexico, and
the Caribbean. Connecting flights are operated as Delta Connection
and United Express under arrangements with Delta and United
The company recently ended its affiliation with Midwest, which will
have little effect on SkyWest's earnings. Delta and United control
SkyWest's scheduling, ticketing, and pricing and receive a
percentage of revenues. SkyWest is reimbursed for most fuel costs.
The company is in litigation with Delta concerning expense
reimbursements, but we doubt future arrangements between the two
airlines will be jeopardized.
SkyWest announced recently that it has entered into a definitive
merger agreement with ExpressJet Holdings. Atlantic Southeast
Airlines, SkyWest's wholly owned subsidiary, will acquire all of
the outstanding common stock of ExpressJet Holdings for a net
purchase price of approximately $133 million cash. ExpressJet
Airlines serves 135 scheduled destinations in North America and the
Caribbean with approximately 1,400 departures per day. The company
provides commuter flights for United and Continental, private
charter flights and third-party ground handling services.
The pick-up in airline travel is now beginning to show its effects
as evidenced by SkyWest's 9.2% increase in passenger revenue miles
during the two-month period ending 5/31/10. SKYW has over $12 per
share in cash ready to expand its operations. The company added new
contracts with AirTran and expanded its agreements with United
Airlines. SkyWest will likely win additional new business during
the next few quarters. The company is interested in adding routes
to Asia. EPS will probably increase by a minimal amount in 2010
followed by a 15% EPS surge in 2011.
SKYW shares are undervalued at only 0.50 times current book value
and 7.9 times EPS. We foresee major changes in the airline industry
that will favor commuter carriers such as SKYW. The company's
dividend yield of 1.3% is attractive. SKYW shares are volatile, but
well worth a look.
J. Royden Ward
For Cabot Wealth Advisory