Easily one of the most hated sectors by investors is the airline industry. The segment has experienced bankruptcies, low profit margins, and heavy competition, all of which have led to big losses for investors in the space.
The sector is even the punch-line of a famous Warren Buffett quote which sums up what many investors feel about the space; ‘How do you become a millionaire? Make a billion dollars and then buy an airline’.
The space has come a long way in the past few years though, and many have seen solid returns thanks to airline investments. This has largely been thanks to low oil prices, though mergers and the rise of hubs have drastically cut down on competition and allowed for bigger profits.
Consider some of the recent performances out of the airline space by the top players. United Continental (UAL) and Southwest (LUV) have both added more than 90% in the past 52 weeks, while Delta (DAL) has flown to a 136% return in just the past 12 months.
(S&P 500 return over same time period: 26%)
Meanwhile, the smaller regional players have also done quite well in this environment, suggesting that the space is really booming. Firms like Hawaiian Airlines (HA), JetBlue (JBLU), and Alaska Air Group (ALK) and Spirit (SAVE) have all more than doubled the market in the past year, with SAVE surging more than 160%.
And with very impressive December traffic for the industry, many are optimistic for earnings season and the near term. This has already started to take place as DAL reported before the bell today, beat estimates and hiked its operating margin estimate, helping to send the entire space higher once again.
Still Not Convinced?
Thanks to these huge gains in such a short time period, some investors might be worried about these airlines staying at their lofty levels. Though, the airline space does have a Zacks Industry Rank in the top third, and with huge oil supplies coming online seemingly every day, pressure could remain on one of the sector’s top costs.
Given this, I think that the airline space still looks favorable here in 2014. Reduced competition seems likely to boost fares (and profits) for the remaining group, and macroeconomic factors still appear to favor cyclicals, and those that benefit from reduced fuel costs.
But what about you?
So are you finally willing to admit that airline stocks might not be so bad after all, or are you still holding out against this competitive (and razor thin profit margin) sector?
Let us know in the comments section below!
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Author is long LUV