Despite Hurdles, Airline Industry Encouraging

The airline sector continues to take a beating as high fuel costs and competitive pricing competition impact the sector. The Amex Airline Index is up 25% from its 52-weeek low and currently continuing to hold in a sideways trading channel with a base at around $47.

 The airline sector continues to be in a restructuring mode, characterized by high fuel costs, intense pricing competition, and a squeeze on margins.

 Yet, despite the concerns, there is some optimism towards the industry for some of the more efficient discounters. Companies that can control their operating costs in the face of higher fuel costs will fare better. The perennial favor in the discount air travel sector is Southwest Airlines Co. (NYSE/LUV), which remains the premier discount play today.

 JetBlue Airways Corp. (NASDAQ/JBLU) is undergoing some selling pressure and dealing with margin pressures. But longer- term, JetBlue is a decent risk-to-reward play.

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 A third discounter that deserves a close look is direct flight air carrier Frontier Airlines Inc. (NASDAQ/FRNT), which is currently trading near its 52-week low.

 Frontier is a company that we like longer-term when the airline sector turns up. The majority of its direct routes are in the United States, but Frontier has expanded into Mexico and recently added a direct flight from its base in Denver to Calgary, Canada. The Calgary route is the company’s first venture into Canada and could signal more routes going forward. The U.S.-Canada trans- border routes are lucrative.

 Frontier’s preliminary traffic results for April were good and continued to point to a turnaround in air travel. Revenue passenger miles surged 27% year-over-year, while “available seat miles” increased 20.1% year-over-year. The resulting load factor for April came in at 80.7%, up 4.4 points from April 2005.

 Going forward, Street estimates call for FRNT to lose $0.25 in the FY06 (ended March 2006), but expects things to turn profitable in the FY07 with profits estimated at $0.29 per diluted share and revenue growth of 22.9% year-over-year to $1.09 billion.

 The numbers are good but FRNT and the airline industry face hurdles. My belief is the airlines sector will eventually move higher in a more sustainable manner. The timeframe for this is uncertain, but we are clearly raising the capacity and load factors are encouraging.