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Many of the major airlines have seen their stocks fall over the last couple weeks. That’s likely due to renewed concerns over industry pricing.
Airlines are once again getting aggressive with pricing and growing market share. This could lead to a land grab of sorts, creating downward pressure on margins in the airline industry.
Two of the big losers of late have been American Airlines (NYSE: AAL) and United Continental (NYSE: UAL), which are down 20% and 14% year-to-date, respectively.
American Airlines, which has been built up as the best player in the industry, has been completely unhedged and unprotected when it comes to oil prices. However, shareholders haven’t been rewarded with a higher stock price. Shares of American Airlines are down 4% over the last 12 months, while the S&P 500 is up 2% over the same period.
If the biggest player in the industry can’t outperform, is there any point in owning any airline stock?
If companies are aggressive with pricing, margins will fall over the long term. And if this is true, none of the major airlines will be safe.
Nonetheless, value can still be found in the airline industry. The key is to stick to the airlines that are already low-cost leaders and have unique routes.
Here are the best airline stocks worth owning today:
Southwest Airlines (NYSE: LUV)
One of the more interesting players is Southwest Airlines, which is up 10% year-to-date, but still trading at just 11 times next year’s earnings. October air traffic for Southwest, measured by revenue passenger miles, was up 10.8% year-over-year last month. Southwest managed to post record third quarter earnings with over $500 million in net income
Longer term, Southwest has generated operating profits for more than 40 years. Last year it started rolling out international flights and has entered large markets, like Atlanta and LaGuardia.
Southwest isn’t just low cost, it’s also improving its efficiency along the way. A couple of years ago it rolled Boeing 737-800 planes, which were more fuel efficient and had longer range routes. It’s going to be rolling out next generation 737 MAX planes soon, further boosting operational efficiency.
Let’s not forget that Southwest is paying a 0.6% dividend yield.
Alaska Air Group (NYSE: ALK)
Alaska Airlines is the largest airline servicing Alaska. It offers specialized routes, running full-service flights along the Pacific Coast. In addition to Alaska, it also runs services to the Western U.S., Canada, Mexico and Hawaii.
Alaska Air is also ahead of the pack in terms of being customer friendly. It was the first airline to offer Internet bookings and embrace electronic ticketing. Over 55% of its ticket sales were made via its website last year, up from 45% in 2009. All this helps keep margins high.
This airline is using its strong cash generative capabilities to pay down debt and buy back stock. It’s also paying out one of the highest dividend yields in the space, coming in at 1%. One of the other real beauties of Alaska Air is that it has an impressive balance sheets. Its debt load is well below peers and its return on invested capital of 20% is industry tops.
The major airlines are still jockeying for position. However, value can be found in the specialty airlines. This includes low-cost leaders like Southwest and those operating unique routes like Alaska Airlines. Both are trading at attractive valuations and offer one of the few dividend yields in the industry.
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