International Airlines: 1 to Buy, 2 to Sell

While preparing for a grand trip to Europe and Eastern Europe, I found myself caught in the frenzy of booking multiple trips on multiple international airlines.

International Airlines: 1 to Buy, 2 to SellI also discovered that while U.S. airlines make a fortune on baggage fees, international airlines are even more greedy, charging for every last little thing.

Hand baggage can only be so big and weigh so much, or they’ll charge you. Checked baggage can only be so big and weigh so much …

Or they’ll charge you double!

I expect there to be coin machines on the bathroom doors, too — you have to insert a Euro dollar to get in.

Naturally, all I could think was how profitable these international airlines must be. Which ones, I thought, might be worthy of owning as a stock?

International Airline Stocks to Buy: Ryanair (RYAAY)

International Airline Stocks to Buy: Ryanair (RYAAY)Europe’s largest low-cost carrier is Ryanair (RYAAY), which is kind of like Europe’s version of Southwest Airlines (LUV), although I’m told by my friends overseas that the airline’s service is absolutely miserable as far as international airlines go.

On the one hand, this is terrible news. Who wants to be known for lousy service? On the other hand, it is great news: If RYAAY can have almost the same market cap as Southwest with horrible service, imagine what it could be if it cleaned up its act?

In fact, RYAAY did clean up its act after changing some elements of its business, such as reducing some of the ridiculous fees it had.

The summer was gangbusters for the airline, so it raised its full-year profit forecast by almost 20%. With more than $5 billion in cash, less than $4 billion in debt, and running free cash flow of more than a billion dollars, I would buy it.

International Airline Stocks to Sell: Singapore Airlines (SINGY)

International Airline Stocks to Sell: Singapore Airlines (SINGY)I have friends who have flown Singapore Airlines (SINGY), and they rave about the premium cabin experience.

If you peruse the travel sites like I do, the first-class cabins are famous for their luxury. Even in coach, Singapore apparently offers service that totally leaves all other international airlines in the dust.

Trying to piece together financials for airline stocks can be difficult because of one-time charges and fluctuating income from year to year. SINGY financials are even more challenging because it has several divisions and their information is a bit difficult to cull through.

However, in parsing SINGY data, I wasn’t impressed with what I found. The fiscal year ending in March wasn’t great. Passenger load declined from 78.9% to 78.5%, but breakeven load factor collapsed from 82% to 79.5%. While it saved lots of money on lower fuel prices, its fuel hedges blew up in its face and wiped out nearly 70% of those savings.

Unlike Ryanair, I’m not seeing great balance sheet or cash flow. I would not buy.

International Airline Stocks to Sell: Deutsche Lufthansa (DLAKY)

International Airline Stocks to Sell: Deutsche Lufthansa (DLAKY)I will be taking a Lufthansa flight during my sojourn abroad, and I’ve heard great things about the airline. It is part of a mega-merger with SwissAir, Austrian Airlines and Germanwings into Deutsche Lufthansa AG (DLAKY).

Yes, there was a two-day pilots strike, and the company is dealing with ongoing labor actions.

Hmm … wish I knew that before I booked that darn flight.

There is ongoing restructuring at the airline, and that’s part of the expense costs that are annoying labor. Still, DLAKY recently reported good earnings thanks to lower fuel costs. A weak euro against the dollar really hurt earnings, though. Nevertheless, the company looks to earn 1.5 billion euros this year.

It’s in good shape with $5.3 billion in cash and only $5.9 billion in debt. However, it is struggling with cash flow. I’d stay away for now, but consider buying in if the labor issue and cost issues are resolved.

As of this writing, Lawrence Meyers did not hold a position in any company mentioned.

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