Where Some Strength Can Be Found in the Airline Industry
High oil prices negatively impact the airlines sector, but there is some hope. Capacity, as measured by the seats sold as a percentage of available seat miles, is steadily rising. Airlines as a group will continue to struggle with the high fuel costs and competitive pricing, but I believe airplane makers show a decent upside trend.
The reality is that we are once again seeing some life resurface in the aerospace stocks, such as Boeing Co. (NYSE/BA), which has recovered from below $30 in early 2003 to over $90, a rise of over 200% in about three years. Boeing is firing on all cylinders as the demand for new airplanes steadily gains. Strong demand out of China and India for planes is driving the demand. China is buying Boeing planes, and there is the potential for thousands more over the next decade as China steadily grows its commercial airline sector and demands new planes.
Boeing has beaten street EPS estimates for the last four straight quarters. In the fourth quarter of 2006, earnings came in at $1.29 per diluted share, $0.31 above the average Street estimate. Boeing is clearly on top of its game.
In the regional jet market, a company that has broken out of a previous trading range is Canada-based Bombardier Inc. (TSX/BBD.SV.B). The maker of regional jets and trains (the world’s largest) was stuck in a downward trend from late 2001 to early 2005, but it is now showing some optimism as the demand for regional jets rise. I believe that as oil prices remain high, more airlines will employ smaller and more cost effective regional jets of up to 110 seats for shorter haul flights. Bombardier may be able to reap the benefits of this potential shift in trend. And if the company can make its train business profitable, the stock can really gain some altitude.