“If you want to be a millionaire,” said Richard Branson, “start with a billion dollars and launch a new airline.”
One of the hardest industries to make money in has to be airlines. You have volatile fuel prices, unions, weather, terrorism, regulation, safety issues and a consumer that demands more and wants to pay less. Some years ago Warren Buffett tried his hand at airlines with US Airways and called it his biggest mistakes and made a substantial loss.
This month I want to take another look at airline stocks as it is a sector that I have actually made money in the past and I am starting to see some value in again. It should also be noted that Berkshire Hathaway run by Warren Buffett has recently started to invest in airline stocks and have reported holdings in American Airlines (AAL), United Continental (UAL), Delta Air Lines (DAL) and Southwest Airlines (LUV) according to a regulatory filing.
13.44% UNITED CONTL HLDGS INC UAL
13.04% DELTA AIR LINES INC DEL DAL
12.89% SOUTHWEST AIRLS CO LUV
12.71% AMERICAN AIRLS GROUP INC AAL
4.69% SPIRIT AIRLS INC SAVE
4.30% JETBLUE AIRWAYS CORP JBLU
4.06% ALASKA AIR GROUP INC ALK
3.58% HAWAIIAN HOLDINGS INC HA
3.25% VIRGIN AMER INC VA
3.09% SKYWEST INC SKYW
There are also transportation ETFs which cover airline stocks but they also have exposure to other transportation stocks and shipping companies such as FEDEX the main one being iShares Transportation Average (IYT) which is near an all-time high.
Spirit Airlines (SAVE) can soar 40%
Spirit Airlines is a low cost airline which could do nothing wrong until 2015 before worries of pricing competition and over expansion sent the stock plummeting down from $80 to $35 before starting an impressive recovery in 2016 back to around $55.
Spirit operates approximately 400 daily flights to 59 destinations in the United States, the Caribbean and Latin America, as well as had a fleet of 79 Airbus single-aisle aircraft comprising 29 A319s, 42 A320s and eight A321s. The company works on an ultra-low cost model and making sure each plane is used to its maximum potential. The downside of its aggressive utilization is that its customer satisfaction is one of the worst in the industry however this is being addressed.
In many ways Spirit reminds me of European airline Ryanair (RYAAY) which also suffered poor customer satisfaction ratings yet continued to be very profitable. The new CEO Bob Fornaro started in February of this year and has a wealth of experience coming from Airtran which merged with Southwest.
Spirit is working on becoming more customer friendly yet maintaining its low cost model. Currently Spirit has the lowest costs with the nearest competitor Southwest (LUV) coming in 40% higher.
Even after the recent bounce shares are at a reasonable P/E of 14 and I see another year of recovery and strong growth for Spirit and we can see the shares at $80 which is around 40% higher than they are currently trading buy the end of 2017. Spirit still has plenty of scope to grow and whilst a balancing act between expanding and not offering too much capacity we can see some great growth in the coming years.
May I take this opportunity to wish you a great Christmas and a happy, healthy and Prosperous 2017