Airline stocks are cyclical and previous downturns have resulted in multiple airline failures and bankruptcies. It’s the question everyone’s been asking: Is it safe to buy airline stocks now? Which ones are the best-run companies?
Benzinga takes a look at some of the best airline stocks so you know where in this industry you should put your money.
Overview: Airline Stocks
In short, U.S. airline stocks have been lousy investments after the industry was deregulated in the late 1970s. The deregulation allowed companies to fiercely compete for business. The federal rule changes resulted in a boom and bust pattern — major profits when times were good and liquidations or bankruptcies when the economy went south.
Companies like Trans World Airlines (TWA), Braniff International and Eastern Air Lines vanished during this era and investors took billions in losses.
The early 2000s was a period of consolidation and restructuring. The number of airlines reduced and the remaining competed and secured the balance sheets of surviving companies. American Airlines Group merged with US Airways. Delta bought Northwest, and Southwest Airlines bought AirTran.
Today the airline industry helps propel $1.7 trillion in economic activity.
The over 10 million jobs in the U.S. airlines now fall into 3 categories:
- Regionals, which offer smaller-jet services to secondary markets under the brands of full-service companies.
- Full-service companies, which fly internationally, serve multiple markets and have various cabin classes.
- Discounters, which have fewer offerings and cover fewer destinations.
Best Online Brokers for Airline Stocks
You can buy airline stock through any online broker with access to the major stock exchanges. Powerful stock screeners, analysis and research tools are available for use by anyone who registers.
You may apply custom filters to identify stocks that fit your investing goals. Most online brokerages will also offer commission-free trades.
Here are Benzinga’s favorites to consider if you trade airline stocks.
Features to Look for in an Airline Stock
You’ll want to ask yourself about unit revenue, stock liquidity and total debt ratio before you choose an airline stock. Here’s what you need to know:
- Unit revenue generally describes revenue statistics adjusted for the amount of flying an airline does. Passenger revenue per available seat mile (PRASM) is the most common unit revenue statistic. It is obtained by dividing airline revenue from ticket sales by the number of available seat miles (ASMs).
Revenues from ticket sales typically rise and fall with air traffic. A higher PRASM is better because it means an airline squeezes more revenue from each unit of capacity.
Revenue per available seat mile (RASM) is an important evaluation metric and factors all sources of revenue. You should consider this for low-cost carriers that often rely on ancillary (non-ticket) revenue to drive sales.
- The stock’s liquidity refers to how quickly the shares of a stock can be sold or bought without significantly impacting the stock price. Airline stocks with low liquidity could be difficult to sell and result in huge losses if you can’t relinquish the shares when necessary.
- Total debt ratio is a great way to understand a company’s financial structure. It compares a firm’s total liabilities versus its total assets. Unlike debt-equity ratio, total debt ratio also factors in short-term liabilities and assets. This ratio may help you assess whether a company will face financial difficulty in future.
A firm with a huge debt ratio will probably incur higher interest payments. This will also reduce profits. A company may then experience difficulty raising capital since investors could see a higher risk of bankruptcy. A huge debt balance could be at risk of credit defaults if the market plummets.
Soar with Confidence in the Airline Industry
The future of the airline industry is still unclear. Some traders speculate further declines and want to use this opportunity to go short on airlines and airplane manufacturers. However, the worst may be behind us, creating an opportunity to buy airline stocks at a huge discount.
Many airline stocks lost as much as 70% to 80%, so the risk-reward ratio is enticing should the stocks regain their previous price levels with the promise of federal relief in coronavirus aid.
Do your homework and avoid companies with vulnerable operations and balance sheets. Travel demand is expected to rise, so there’s ample room to soar into the foreseeable future.