Clear Skies Ahead for These Airline Stocks - Analyst Blog

by Thomas Young

If one looked at the graphic below, one might get the impression that Southwest Airlines LUV, Alaska Air Group ALK, and American Airlines Group AAL are due for a downturn.

Presuming one came to such a conclusion, one would be forgetting five factors that may make such an individual look foolish a year from now.

Note: Chart is only display American Airlines numbers post-US Airways merger.

1) The Airline Industry Hasn't Peaked Yet

First, two key indicators for the airline industry still have a ways to go before any sign of peaking.

To begin, in-transit restaurant services show signs of further growth. The indicator is still another $100 million away from its previous peak and at least another $500 million (20%) away from where is should be based on trend.

Next, passenger enplanements still have perhaps another 10 million enplanements to gain before one could say there's any peak in airline travel.

2) Passenger Seat Miles Should Increase to Meet Demand Second, available passenger seat miles has not kept up with business and population demand, potentially putting upward pressure on pricing in the near future. This is evidenced in the graphic that follows. The blue line represents the historical available seat miles (number of seats available x number of miles flown), the dotted black line represents the historical trend, and the pink line is where the trend would be if one ignored history before 2009. Overall, and unsurprisingly, airlines have been quite cautious at adding available seat miles, which, if a supply and demand relationship generally holds, should put upward pressure on prices in the near future.

3) The Airlines Industry is One of the Fastest Growing Since 2009

Third, the market has only partially figured out the strength in the airline industry. The following is the total percentage change in the 13 industrial components of the S&P 1500. Interestingly, on top is the airlines industry at about 190% since 2009.

The market's exhibited conviction that the airlines industry is due for some strong years ahead is evident by the industry's overall top performance compared to other industries.

4) Top Airlines Have Shown Results to Investors

Fourth, Southwest, Alaska, and American have been good to their customers and investors.

Recently, Southwest increased its dividend to $0.06 per share, a 50% increase from the previous $0.04 per share. Financial results have also been strong, with QE March 2014 net income at $152 million, equating to $0.22 per diluted share, or an approximate 158 percent increase compared to the same period last year.

See Southwest's full statement in an interactive chart here.

This past week, Alaska Air Group's board of directors approved a share repurchase program, allowing share repurchases of up $650 million. The board of directors also approved a cash dividend of $0.25 per share on a quarterly basis, up from $0.20 per share in August 2013. The dividend payout represents the first dividend payout since 1992. First quarter 2014 pretax income for Alaska Air Group was $152 million, compared to $59 million in the first quarter of 2013.

See the interactive income statement chart here.

In December 2013, AMR Corporation and US Airways Group Incorporated announced the completion of the companies' merger, officially forming American Airlines Group. First quarter 2014 net profit was incredibly positive at $480 million, much better than the $297 million loss in the first quarter of 2013.

Since the merger, American's profitability has been driven partly by consolidating operations at over 55 airports.

5. Low-cost Air Travel Should Continue to Grow

Fifth, Southwest, Alaska, and American know how to appeal to the lower end consumer, which is the consumer set to be the strongest growing airline consumer this year.

Overall, with Southwest Airlines, Alaska Air Group, and American Airlines Group set for earnings announcements in the third or fourth week of July, don't be surprised with signs of sustainable strength.

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