by Susan J. Aluise | July 9, 2013 10:55 am
“If you want to be a millionaire,” Virgin Atlantic founder Richard Branson once mused, “start with a billion dollars and launch a new airline.” The pithy quote sums up the challenges airlines face today, as the industry’s profit margins have been compared to a public charity.
Airline operating costs continue to rise — fuel prices alone have doubled over the past 10 years — all while labor and maintenance costs have increased substantially as well. Last year, the world’s airlines eked out a 1.1% profit margin. Sure, International Air Transport Association Director General Tony Tyler believes that will rise to 1.8% this year … but that still translates to a grim $4 profit per passenger.
“That may be enough for a sandwich, but it is nowhere near the returns that our investors expect,” Tyler said last week. “To keep up with the growing demand for connectivity, over the next 20 years we will need to attract financing to support aircraft orders in the range of $4 trillion to $5 trillion.”
No wonder many commercial airlines are building their future fleets on new cost-efficient aircraft like Boeing’s (BA) 787 Dreamliner and EADS (EADSY) Airbus’ A350, both of which basked in the spotlight of the recent Paris Air Show.
Still, despite the headwinds facing this heavily regulated, capital-intensive industry, opportunities remain for the carriers best-equipped to ride out the turbulence.
After a bruising decade characterized by bankruptcies and epic losses, U.S. airlines’ revenue growth has at least rebounded to pre-recession levels, according to a recent state-of-the industry report by PriceWaterhouseCooper’s.
And the crash of an Asiana Boeing 777 in San Francisco over the weekend notwithstanding, commercial air travel has never been safer. Western-built commercial jets did not experience a single hull loss in 2012 and today’s technologically advanced jetliners also have increased survivability if and when accidents do occur
All in all, U.S. airlines have fared better than many of their counterparts around the world recently. With that in mind, Take a look:
With these factors in mind, which stocks should investors take a ride with?
US Airways is a promising option, to start. The company has been recording strong load factors, and also boasts a compelling valuation. The stock has bounced 74% above its 52-week low last August on the American Airlines deal, but still has a price/earnings-to-growth ratio of just 0.19 and a forward price-to-earnings ratio of less than 6.
United Continental is another solid pick, as the company should largely be over the hump in the integration process and, like Delta, should continue to benefit from ancillary fees.
Investors should be cautious with Southwest, on the other hand, despite its attrative valuation. The company could sruggle slightly in the near-term as it ramps up the integration with AirTran.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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