Finally! A Glimmer of Hope for Airline Stocks

After three months of steep decline in air fares, there’s finally some good news for investors in the aviation industry. According to the Bureau of Labor Statistics, airline fares increased 1.5% M/M in October. Although the average fare was still a little over 5% lower Y/Y, I think this is a positive development for airline stocks, especially the low cost carriers.

What makes it better is the fact that air fares have moved up despite oil prices falling to around $40 per barrel. Investors were earlier worried that the airlines would cannibalize the profits of cheaper crude by competing on price.
However, the recent development shows that the companies have learned from the past mistakes and will not aggressively reduce ticket costs so as to gain market share.

Investors can use this opportunity to buy some airline stocks as I believe the stabilizing air fares will help the carriers post better-than-expected results in the holiday season. For me, the stocks that represent the best value for money in the aviation industry are JetBlue (JBLU) and Spirit Airlines (SAVE).

JetBlue (JBLU) has been a great stock to hold this year as the company has been one of the best performing stock in the aviation sector. While the stock has appreciated significantly this year, I think JetBlue still has room to head higher.

JetBlue has managed to buck the trend of 4%-6% drop in unit revenue that other airlines witnessed over the last quarter. The company’s new revenue driving initiatives helped it to compensate for the weak air fare environment. As a result, the company performed the best on unit revenue basis in the last quarter. With prices now seemingly stabilizing, I think JetBlue can offer more upside and hit $30 in the coming months.

Unlike JetBlue, Spirit has been a terrible performer this year. The stock has lost almost 60% of its value since reaching the 52-week highs. Spirit is a low cost carrier that offers the cheapest ticket in the aviation industry. Consequently, the competitive pricing had a huge negative impact on its unit revenue. The company reported 17%+ decline in unit revenue and expects a larger decline going forward.

However, these are short-term headwinds and investors should focus on the company’s long-term outlook. Spirit is still expected to witness double-digit revenue and earnings growth for at least five more quarters. The company has the highest profit margin in the industry and unlike other carriers, it isn’t debt ridden. Despite all the positives, the company still trades at a meager 9x forward earnings. I think Spirit Airlines is criminally undervalued and the stock is a strong buy at present levels.

Hence, I think investors should buy these two airline stocks to benefit from the stabilizing air fare environment.
Published on Nov 24, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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