Investing in Airlines While They're Still on the Ground

Brittney Barrett  |

With airline stocks plummeting once again today alongside oil prices topping off at $109 a barrel, the sector isn’t looking all that appealing. That may; however be a reason to invest, albeit, for the long rather than the short term. Unlike tech start-ups and social media, the threat of a myspace type decline, doesn’t exist for airlines. So long as the company is stable and established, they will go back up. Unless someone wraps their head around teleportation, people are always going to fly. The industry is prone to fluctuations dependent on such things as fuel prices, weather and the ways they individual companies compensate for competitive pricing, but planes, and the companies that rely on them will always take off and land. Right now, the whole index is on the ground, but there are a number of factors that indicate it could be on its way back up soon.

The spike in oil prices, which had led to per barrel pricing at its highest levels since 2008, is unlikely to maintain itself for too long. President Obama has vowed for a significant increase in domestic production that would help weaken the link between Middle Eastern politics and our domestic economy. Additionally, a 30% increase in the number of active Saudi Arabian oil prices and greater integration of bioplastics, which use less petroleum than regular plastics are bound to help the market to its feet again. Granted, it will be a slow crawl back to regular prices and how soon these promises will start making a tangible difference remains to be seen, but patience will be a virtue for investors in this market.

Other recent challenges to the airline industry have been the scrutiny of Southwest Airlines (NYSE: LUV). Southwest has been getting a lot of heat lately from maintenance issues and maintenance difficulties with some of their planes. The company has been diligent in taking action and doing research; however, and has discovered the problems are occurring exclusively in short-lived older models that make up only a very small percentage of their fleet. This issue is much smaller than something like the massive recalls demanded of Toyota for their brake problems. Southwest shouldn’t have too much trouble bouncing back from this.

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Essentially, when the fuel prices and the attention over the Southwest problems begin to fade, the currently depleted ticket sales could be predicted to experience a considerable spike. People putting off vacations because of high prices may decide to take when oil cools off and prices finally fall. As a result the stocks will bounce back from their current positions on the positive news.

Even now, the appearance of the factors against airlines is worse than the underlying reality. Traffic for American Airlines in March was up 0.8% to 10.66 billion revenue passenger miles, the equivalent one passenger flown one mile. Capacity has declined only slightly more than 1.5% from last year for the airline when ticket prices were significantly lower, meaning the economic recovery is paring some losses and exhibiting its strength.

Other airlines are seeing similar improvements. Delta announced a March traffic rise of 0.5% to 16.14 billion revenue passenger miles. Again, load factors fell from the year ago period, but it’s unlikely the depleted passenger numbers will persist once oil slips back down.

US Airways (NYSE: LCC) released the most promising reports for March with traffic up 3.9% and the airline’s load factor climbing to 83.4% from last year’s 83.2%. Despite these improvements; however, shares of the company still fell today, meaning investor response is not in line with actual numbers. This presents an opportunity for profit. Getting in low here and waiting for investors to catch up and external factors to improve has the potential to produce significant gains.

From an investment standpoint, it’s a good idea to support companies that are well respected in the industry. Just because an airline is trading low, doesn’t mean it will produce the largest margins. The company should have a good reputation and a history of standing competitive. Jetblue (NASDAQ:JBLU), for instance is very popular with frequent fliers and has managed to stay afloat even through the high oil prices. If it can survive the current landscape, it will thrive even more once fuel prices fall. It’s up1.46% in trading today but still trading considerably beneath 52-week highs.

Southwest (NYSE: LUV) is also an option and despite recent scrutiny the stock has proved that it’s generally pretty stable. Even this latest hiccup hasn’t pushed share prices down too much, meaning it’s probably a safe bet that when more people are flying, business will bounce back.






DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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