In the past few years, global air travel demand has grown at a rapid pace. As such, airlines have been able to capitalize on this opportunity and have been able to post impressive earnings as of late. In addition, these airlines’ stocks have also had a nice tailwind from low oil prices and the stronger dollar. However, there are many risks that investors need to be aware of before buying into this sector. For example, upcoming air travel safety technology could force airlines to spend much more on maintenance and repairs. Furthermore, new competition from private jets could also hurt their business in the long term. Therefore, before you invest in these airline stocks, it’s vital that you understand these risks and how they may affect the company moving forward.
Southwest Airlines Company (LUV)
The Southwest Airlines Company is the world’s largest low-cost carrier. The company offers low-cost travel by operating a short-haul fleet of Boeing 737 aircraft. Southwest Airlines is a pure play on the low-cost travel sector, with ~80% of its revenues coming from this business segment. Southwest Airlines has a very nice business model as it can generate high profits by keeping its operating costs low. Southwest Airlines has one of the best cost structures in its industry. Therefore, even when the air travel demand is low, the company can still generate excellent cash flows and profit margins. Because low-cost air travel is very price sensitive, Southwest Airlines has maintained a very high load factor of around 80%. As a result, Southwest Airlines has the highest load factor in the industry. Southwest Airlines has also expanded its capacity and has managed to grow its revenues and profits in the past few years. Southwest Airlines’ total revenues increased from $25 billion in 2012 to $38 billion in 2017, while its net profit increased from $2.1 billion to $3.3 billion over the same period.
Copa Holdings (CPA)
Copa Holdings is the largest airline in Central America and the Caribbean. The company’s principal operating hub is in Panama City, Panama, where it operates a fleet of Boeing 737 and Airbus A320 aircraft. Copa Holdings is one of the largest airlines in Latin America and has a very nice business model. The company primarily serves high-yield business and tourism destinations in Latin America and the Caribbean. Copa Holdings’ main competitors are big global airlines like American Airlines, Delta, and Southwest Airlines. Therefore, Copa Holdings is purely a low-cost carrier and does not have the same earnings growth trajectory as full-service airlines.
Nonetheless, Copa Holdings does generate very nice profits, and it can maintain high and consistent profitability. This is because Copa Holdings is a low-cost carrier that does not have the exact costs as the full-service airlines. As a result, Copa Holdings has been able to generate consistent profits after the Great Recession and the low oil prices over the past few years.
Ryanair Holdings (RYAAY)
Ryanair Holdings is the leading low-cost airline in Europe and the largest airline in the world by number of passengers. The company’s central hub is in Dublin, Ireland, where it operates a fleet of Boeing 737 and Boeing 737 MAX aircraft. Ryanair Holdings is a low-cost carrier; most of its business is short-haul flights in the European and Asian markets. Because the company is a low-cost carrier, it has significantly reduced its costs over the past decade. As a result, Ryanair Holdings can generate profits on almost every flight it flies.
Nonetheless, Ryanair Holdings is a risky investment, as the company’s aggressive cost-cutting can backfire in the future. Indeed, some of the airlines’ cost-cutting measures have come at the expense of the safety of its passengers. For example, Ryanair Holdings has had many incidents in which it canceled its flights because of bad weather conditions. Furthermore, the company has also been criticized for having a poor reputation for customer service.
Alaska Air Group (ALK)
Alaska Air Group is the third-largest airline in the United States and the largest air carrier in Alaska. The company’s central hub is in Seattle, Washington, where it operates a fleet of Boeing 737 and Boeing 737 MAX aircraft. Alaska Air Group is also the parent company of Virgin America, a low-cost carrier that primarily serves the West Coast. Alaska Air Group is a pure play on the low-cost travel segment, with ~85% of its revenues coming from this business.ConclusionThe airline industry is a cyclical business that experiences a lot of ups and downs. As such, airline stocks are generally considered to be risky investments. However, some airline stocks are worthy of investment. These stocks will deliver strong earnings growth in the next five years. If you want to invest in the airline sector, then you must be careful and select only the best airline stocks.