Airlines among strongest stocks in 2014

Staff Writer
Columbus CEO

DALLAS (AP) — You just spent a small fortune on airline tickets — and the extra charges for the bags — for your family's summer vacation. All your flights were packed with other passengers who also paid richly for the ride.

No wonder airline profits are sky-high.

Back home now, you might ask if you can share in the airlines' good fortune by buying their stock.

The answer: maybe you can, but you missed the big payoff.

Airlines have been among the strongest stocks so far in 2014, easily beating broad measures such as the Standard & Poor's 500 index and the Dow Jones industrial average. Since late 2011, when speculation sprouted about a merger between American Airlines and US Airways, the Arca airline index has soared 186 percent. During that time frame, Delta Air Lines Inc. shares have risen fivefold, Southwest Airlines Co. shares have more than quadrupled, and United Continental Holdings Inc. has nearly tripled.

In the same period, the S&P 500 rose 68 percent, and the Dow gained 48 percent.

Most U.S. airlines have recovered fully from the one-two combination of record-high oil prices and the recession, which staggered them in 2008. Profit at nine leading U.S. airlines more than doubled to $3.8 billion in the first half of this year, compared with a year earlier.

A growing U.S. economy should encourage air travel, and many economists expect growth of around 3 percent in the second half of this year, up from 1.1 percent in the first half.

Still, the carriers will be hard-pressed to keep growing profits. Delta said Wednesday that revenue for every seat flown one mile — an important statistic in the airline business — grew 2 percent in August, a slowdown from earlier this year.

Savanthi Syth, an analyst with Raymond James, said that investors considering airlines must keep expectations in check.

"The bear case would be that the big improvements are done, and earnings growth is going to slow," she said, noting that it will be hard to repeat the returns of the last two years unless the economy booms. Even so, she thinks there are still potential gains for airline stocks.

Analysts who have seen their longtime faith in the airlines rewarded during past two-plus years say this is no time to sell.

"If you look at airline stocks against other transports or other industrial stocks, the valuation is still comically low," said Hunter Keay, an analyst who tracks airline stocks for Wolfe Research.

He says that Delta and some others still have low price-earnings ratios. That's because investors aren't sure that the airlines will remain profitable for the long haul, even through downturns.

"The airlines still haven't really been tested by another crisis" such as another huge spike in fuel prices, Keay said, and until they are, investors will naturally be skeptical.

The biggest threat to the airlines' rally, besides a slump in the economy or the broader stock market, is the fear that they would add too many flights too soon, leading to a glut of seats and triggering fare wars. When such concerns emerged this summer, particularly with routes between U.S. and Europe, the stocks slipped. The airlines ratcheted down their plans to expand trans-Atlantic flying by this winter, and the concern about overcapacity evaporated.

Mergers have left four companies — American, United, Delta and Southwest — controlling more than 80 percent of the domestic market. That has led to fewer price wars and kept airfares and revenue rising.

Michael Derchin, an analyst with CRT Capital, sees no reason that will change. He said travelers can expect that flights will remain nearly full, which could mean higher fares, particularly at peak periods, and new or increased fees.

Passengers don't want to pay more, but airlines are taking a more pro-investor stance.

Delta and American have reinstated their dividends, while also reducing debt and contributing to pension plans. And both are buying back shares, a move that boosts the value of remaining shares and is popular with shareholders.

Analysts say the dividends are an important signal that airline managements are paying more attention to profits.

"In the old days, when they made money the first thing they would do is call Boeing or Airbus and order an airplane," Derchin said. "Nowadays some portion of their free cash is being used to buy back shares, pay some dividends, improve the pensions. It's more balanced."