The Amex Airline Index is currently moving sideways and looking for direction. The continued gyration in oil prices and intense price competition has pressured airline stocks, but the overall situation is much better now than it was a few years back.
So, what airlines do you invest in? In my view, I continue to like the discount airlines.
At the top of my list is the granddaddy of all discounters that every player wants to emulate: Dallas, Texas-based Southwest Airlines Co. (NYSE/LUV)
Southwest Airlines started with three Boeing 737 aircrafts in June 1971, serving Dallas, Houston, and San Antonio. Today, with 400 Boeing 737 aircrafts, Southwest is the dominant discount or low- fare airline in the U.S. Its routes are focused on the U.S., and are generally short-haul and high frequency, but there are long-haul routes.
The carrier focuses mainly on point-to-point routes (direct nonstop city-to-city) rather than hub-and-spoke service (including indirect flights). This is a significant difference favoring Southwest.
The airline industry is not in a growth mode, but the discount area has excellent potential. With all of the negative news in the industry, it may be an opportune time to buy Southwest. In spite of the carnage in the airline industry, Southwest has been reported some decent numbers over the past few years. Its ability to turn a profit year after year is impressive. Southwest has been profitable for the last 32 consecutive years, which is impressive.
Its low-cost structure and experience at running a discount carrier for over 20 years gives the company an advantage over other low- fare carriers and the major airlines.
Southwest’s forward FY07 estimated P/E of 16.82 x its FY08 EPS is reasonable given the situation. Earnings in the FY08 are expected to jump to $1.03 per share on revenues of $11.12 billion. The airline’s valuation is superior to that of its peer group. Other discounters to keep an eye on include Frontier Airlines Incorporated (NASDAQ/FRNT) and JetBlue Airways Corporation. (NASDAQ/JBLU).