You've probably seen the advertisement from one well known airline that asks viewers, "Wanna get away?" Well, since the deregulation of the industry back in 1978, airline stocks often have made investors want to do just that -- get far, far away. Since deregulation, close to 200 US airlines have filled for bankruptcy, according to Airlines for America. Most have been smaller, regional lines, but the big guys have had plenty of trouble -- TWA and PanAm are among those that have gone the way of the dodo bird, and Delta, US Air, United, Continental, and American have all been through bankruptcy proceedings at one time or another.
But since the start of 2009, airline bankruptcies have fallen sharply. Yes, some of that likely has to do with the ultra low interest rates created by the Federal Reserve, which may well have allowed marginal firms to skirt bankruptcy -- the average debt/equity ratio in the industry is more than 350%. But part of it is simply due to better performance by a lot of these airlines. Creative marketing, economies-of-scale-creating mergers, new (albeit annoying) methods of generating revenue (I'm looking at you, bag fees) -- all of this has helped a number of airlines turn things around.
Of course, there are still plenty of bad, overleveraged firms in the airline industry. That's why you should be selective and dig into a firm's financials and fundamentals when picking airline stocks. Recently I used my Guru Strategies, which are based on the approaches of history's most successful investors, to find some fundamentally sound airlines. Here's a quartet that stood out above the rest.
Delta Air Lines ( DAL ): Nine years after it filed for bankruptcy, this Atlanta-based firm is the largest of the publicly traded airlines, and it's gotten its act together. The $35-billion-market-cap company gets strong interest from my James O'Shaughnessy-inspired model, thanks in part to the fact that it has upped earnings per share in each of the past five years. The strategy also likes Delta's combination of a high relative strength (92) and reasonable price tag (0.9 price/sales ratio).
Southwest Airlines Co. ( LUV ): This one-time upstart has become a major player in the industry, taking in $18 billion in annual revenues. The Dallas-based firm operates Southwest Airlines and AirTran Airways, and its strong growth helps earn it interest from the strategy I base on the writings of mutual fund legend Peter Lynch. Lynch famously used the P/E-to-Growth ratio ( PEG ) to find bargain-priced growth stocks. When we divide Southwest's 22.3 price/earnings ratio by its 40.9% long term EPS growth rate (I use an average of the 3-, 4-, and 5-year EPS growth rates to determine a long-term rate) we get a PEG of just 0.55. That easily comes in under the model's 1.0 upper limit. The Lynch-based model also likes the company's 43% debt/equity ratio, which is quite low for an airline.
Alaska Air Group, Inc. ( ALK ): Actually based in Washington state, Alaska Air is the parent of Alaska Airlines and Horizon Air Industries, which with partner regional airlines serve 90 locations in the US, Canada, and Mexico. It's another favorite of my Lynch model, which likes the firm's 35.7% long term growth rate. Shares trade for 12.5 times earnings, making for a stellar 0.35 PEG ratio. Alaska Air also has a very reasonable 39.8% debt/equity ratio.
Copa Holdings, S.A. ( CPA ): This Latin American provider of passenger and cargo service is the parent of Copa Airlines, which offers more than 280 daily scheduled flights to North, Central and South America and the Caribbean and another 120 cities through an arrangement with United. It's also the parent of Copa Airlines Colombia, which primarily offers service within Colombia. Copa gets strong interest from my Lynch model, which likes its 21.2% long term growth and 13.6 P/E. That makes for a solid 0.64 PEG.
My Warren Buffett-inspired model also has interest in Copa. It likes that the airline has upped EPS in all but two years of the past decade, has long term debt that is less than twice annual earnings, and has averaged a 19.4% return on equity over the last decade.
At the time of publication, John Reese was long DAL.