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I am one of those who has always been fascinated by airplanes and I can’t imagine ever getting tired of getting onboard of one. But investing in a commercial airline is a whole other story. There are so many reasons to avoid getting involved and yet hope always remains. These companies struggle to remain profitable but there are always believers that now is the right time and that eventually they will get a break.
The problem of course is that airline stocks depend on many factors that are outside of their control, namely:
-Terrorism: Attacks like September 11 or even smaller ones such as the Detroit Christmas scare are enough to scare away some consumers which has a direct impact on prices
-Economy: As the economy goes, so do airlines. Why? Yes sure people travel more and further away for vacations when they have more money and confidence but what is even more true is that business class passengers (those who bring up the big bucks right?) tend to pay a lot more attention to money spent when things are tougher. That 8,000$ last minute flight to Paris will likely just not happen if things are going badly and shareholders are breathing down the board’s neck!
-Oil prices: On the expense side, we’ve already seen the impact that oil prices can have on airlines. The decision to hedge prices or not can be a killer in one sense or another. Lock in a 100$/barrell oil when prices go up to 150$ and you will be laughing as competitors struggle to keep up with your prices. But if you do that and prices dip down to 50$.. You might want to get ready for Chapter 11.
And so yes, it is an unprofitable industry (in general, there are exceptions) and one that could raplidly find itself in need of a bailout if things went badly (i.e. another September 11). But there are some smaller and younger companies that have been doing very well in recent years. Take a look below at the graph of Southwest Airlines, one of the more efficient companies around.
And so here you have it, the table of the US airlines, and you can quickly notice that the majority do not even have a P/E ratio. That is of course because they are not making profits! But find the right airline and you might just make a great investment.
Which one would you consider owning?
TICKER NAME Market Cap Price:D-1 P/E Total Return YTD Revenue T12M EPS T12M
DAL DELTA AIR LINES INC 9993469952 13.17 15.729349 27971000320 -3.57
LUV SOUTHWEST AIRLINES CO 8369081856 11.46 70.572502 0.262465 10372999936 -0.15
CAL CONTINENTAL AIRLINES-CLASS B 2800884992 20.84 16.294643 12876000000 -5.29
AMR AMR CORP 2697878016 8.29 7.244501 20324000256 -5.22
CPA COPA HOLDINGS SA-CLASS A 2287584000 54.639999 12.25926 0.312095 1256174016 5.14
UAUA UAL CORP 2238347008 13.93 7.900856 16688999680 -12.75
JBLU JETBLUE AIRWAYS CORP 1634418944 5.74 40.214291 5.3211 3265000000 -0.06
ALK ALASKA AIR GROUP INC 1272018944 37.400002 12.52844 8.217592 3380800000 0.67
ALGT ALLEGIANT TRAVEL CO 994399424 50.209999 12.2122 6.444777 545638992 4.17
LCC US AIRWAYS GROUP INC 889286976 5.59 15.495868 10592999936 -5.77
SKYW SKYWEST INC 879676288 16.34 10.01266 -3.427896 2752507008 1.52
AAI AIRTRAN HOLDINGS INC 737356480 5.52 11.43937 5.74713 2332424960 -0.02
HA HAWAIIAN HOLDINGS INC 345864384 6.88 6.461538 -1.714284 1186791008 1.36
RJET REPUBLIC AIRWAYS HOLDINGS IN 236318000 7.27 4.546358 -1.490517 1344146016 1.12
PNCL PINNACLE AIRLINES CORP 143987296 7.85 6.709402 14.098834 853830000 1.8
XJT EXPRESSJET HOLDINGS INC 68252240 4.39 -8.921167 680039984 -3.77
BLTA BALTIA AIR LINES INC 36375592 0.083 -12.631581 0 -0.01
GLUX GREAT LAKES AVIATION LTD 20723360 1.45 3.717949 3.571434 120903744 0.39
MESAQ MESA AIR GROUP INC 8664746 0.042 -65.090904 1056008992 -1.04
GIA GULFSTREAM INTERNATIONAL GRP 5058405 1.46 8.148149 88683000 -2.18
ALHN ALLIANCE NETWORK COMMUNICATI 998888.875 0.053 -34.567902 25088889 -1.05
SKAS SAKER AVIATION SERVICES INC 675289 0.02 -66.666664 -0.13
USHP US HELICOPTER CORP 228563.4063 0.005 0 4287349.938 -0.34
TWAIQ TRANS WORLD AIRLINES 35948.26172 0.0005 -55.555553 3538326912 -5.7
RHWI RIVER HAWK AVIATION INC 9003.53125 0.002188 -95.625 9533866 -19.15
VGDAQ VANGUARD AIRLINES INC 861.979675 0.000125 0 126219000 -4.55
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Nice picture. We know that government had decided in December to increase security measures for all flights to the United States (because of the December 25 incident on Northwest airlines). Because all these reasons you mentioned, the industry of private business jets and executive jet charters had explode the past few weeks!! They can increase flexibility and enhance your privacy and security. And prices are not that bad considering the time saved! Maybe that’s the future?
@Zavi – Yes I see your point but even those companies have suffered. Think about all of those public reactions to executives spending money on private business jets? I don’t agree with those calls to justice but they are there.
Pinnacle Airlines.
Market cap: 150 mio. FCF 2009 should be approx. 75-80 mio. (normalized 55+). Tangible net book value: way above $12 / share. Growing its business. Trading at a mere $ 8 (but steadily rising since after the Colgan crash, which is covered by insurance).
Earnings don’t really matter, due to comlicated tax situation after Northwest bankruptcy (they got and will get big tax refunds for loosing money which they did by buying Colgan Air and are still doing by buying new planes (Q400s) for Colgan).
The balance sheet looks not too great on first glance due to GAAP accounting regarding a “deferred revenue liability” of 216 mio. arising out of the Northwest bankruptcy that can be ignored as it does not require the company to deliver any services or make any payments at all.
A little older but still interesting:
http://seekingalpha.com/article/118144-pinnacle-airlines-risk-reward-makes-it-worth-a-look
“In 2008, 75% of Pinnacle’s revenue was generated under “Capacity Purchase Agreements”. This is a cost plus model where Pinnacle’s airline customers such as Delta/Northwest assume many of the risks that typically make airline earnings cyclical and volatile. Pinnacle does not assume fuel risk or consumer demand risk and is reimbursed for costs such as insurance and airport landing fees.”
These contracts continue for the next 7 years, so imO a 7 year multiple on FCF seems to be the minimum for any “fair value” discussion.
More current discussion:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_P/threadview?m=te&bn=22930&tid=3619&mid=3619&tof=16&frt=2#3619
The future:
http://www.centreforaviation.com/news/2009/12/14/smaller-regional-jets-doomed-pinnacle-discusses-expected-industry-changes/page1
(though I expect PNCL to reduce their DAL flying less than indicated in the article due to Mesa going belly up and DAL probably adding former JAL flying.
@Positroll – thanks a lot for those comments, are you a holder of Pinnacle?
Yes. Bought a little at $ 6 a long time ago, held on (too long), started heavy buying below $ 2,50 when they recovered after the Colgan crash (as investors were reassured that insurance would cover all costs), sold 1/4 aroung 6.60, holding another 1/4 until we get to $10-12 and the remaining half for fair value …