For decades, investors regarded airline stocks as a poor investment. Forty years ago, the Airline Deregulation Act of 1978 turned airlines from a highly-regulated oligopoly to a competitive industry.
While this brought air travel to the masses, it also turned airline stocks into losing investments. Iconic airlines such as Pan Am, Eastern, and TWA ultimately shut down or sold out amid the competition. Even the three surviving legacy airlines, American (NASDAQ:AAL), Delta (NYSE:DAL), and United (NYSE:UAL), had to reorganize in bankruptcy.
However, beginning with Southwest Airlines (NYSE:LUV), a new generation of non-legacy airlines emerged. Today, these newer airlines continue to claim larger shares of the domestic market. Some have even brought the market profitable airline stocks. In fact, those who bought LUV stock in 1975 got into the equity at the split-adjusted price of one cent per share!
That’s not to say these stocks have overcome all their challenges. In fact, airline stocks have fallen in recent weeks as rising costs weigh on profit margins. However, fuel prices constantly fluctuate, and such drops usually amount to buying opportunities. For continued profits in airline stocks, investors should look to these carriers for gains going forward:
LATAM Airlines Group S.A. (LTM)
LATAM Airlines Group (NYSE:LTM) offers many benefits to investors in airline stocks. Based in Santiago, Chile, it connects what arguably stands as Latin America’s strongest economy to both its neighbors and the rest of the world. It offers both passenger and cargo services. The airline also operates a loyalty program called Multiplus, which allows for the exchange of points for trips and other benefits.
Formerly LAN Airlines, LATAM operated as Chile’s national airline until the 1990’s. A merger between LAN and Brazil’s TAM airlines formed the LATAM Airlines Group — the merger was completed in 2012. Today, LATAM dominates in Chile as well as Peru. It also has become the second-largest airline in Argentina, Colombia, and Ecuador.
Moreover, LATAM has set its sights beyond its core region. The airline inaugurated service to Melbourne, Australia last year. Plans are also in place to serve destinations such as Washington, D.C., London, and Tel Aviv. LATAM currently serves the U.S. through code-sharing arrangements with other airlines.
This expansion should go far in driving its massive profit growth. Analysts expect profits to grow by 34.6% this year and 91.4% the next. They also predict an average annual growth rate of 53.8% per year over the next five years. Despite the massive profit increases, the airline trades at a forward price-to-earnings ratio of about 26. While that may come in high for an airline, this P/E stands only slightly higher than the S&P 500 average.
Even better for new investors, the stock has fallen by close to 50% from its 52-week high. This gives buyers the opportunity to get in at a substantial discount. With massive growth and an emerging global presence in the foreseeable future, investors should do well with LTM stock.
SkyWest (NASDAQ:SKYW) has become the largest regional carrier in the U.S. — measured in passenger loads. The St. George, Utah-based airline contracts with larger carriers and usually operates under their name. By offering these flights, it carries passengers from smaller regional airports into the large hubs. Under this model, it serves 247 destinations utilizing 453 aircraft. Last year, SkyWest carried about 35.9 million passengers.
SkyWest has also seen massive growth, especially compared to most airline stocks. Despite the move higher, its forward P/E comes in at about 11.2. SKYW traded in the $7 per share range as recently as 2014. But after a sustained move higher for the last few years, SKYW now trades in the $55+ range — an increase of over 600%.
The move higher looks poised to continue. This year, analysts forecast 44% profit growth. The company has also seen double-digit profit growth in the previous five years. Wall Street predicts a 17.9% average annual growth rate in the next five years.
SKYW also will see a reduction in income tax expenses from the corporate tax cuts. This, along with improvements in efficiency, has allowed the company to raise dividend payments by 25%. Currently, however, this 40 cent payout yields only about 0.7% for new investors.
Still, ongoing improvements should take profits higher. With its recent track record and the indications that growth will continue, SKYW stock should outperform most of its industry peers.
Spirit Airlines (SAVE)
Few airline stocks have enjoyed the success offered by Spirit Airlines (NYSE:SAVE). The Miramar, Florida-based ultra-low-fare carrier continues its growth path as passenger opt for low fares over frills.
The airline’s stream of profit growth was interrupted this year, however. Labor issues related to pay and a pilot shortage forced Spirit to give its pilots a substantial pay raise. Due to these costs, analysts forecast only 1.5% profit growth for the year. As a result, SAVE stock trades close to where it stood at the beginning of the year.
However, I view the challenges of 2018 as one-time events. Wall Street predicts 28.1% profit growth for next year. And with a 13.2 forward P/E, SAVE stock is attractively valued.
I also believe the growth will continue. The airline recently added service to Greensboro and Asheville, North Carolina. The expansion into South America also continues with service to Cali, Colombia slotted to begin this December.
Another possible growth catalyst involves a plan to serve smaller markets within the U.S.
Spirit has considered adding a second aircraft type to facilitate such a move. Although I like when airlines such as Spirit stay with one aircraft type, I believe these regional markets would justify the expenses and hassles associated with a second plane type.
Spirit could also bring these markets something they rarely see — low fares. Larger markets saw the so-called “Southwest effect” when Southwest’s market entrance brought lower fares and more flights. In theory, Spirit could do the same thing for smaller markets. Such a move along with its deeper push into South America should continue to push SAVE stock higher for years to come.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.