What are we looking for?
Attractive investments in the U.S. airline industry.
The U.S. dollar index (which tracks the greenback against six major world currencies) hit its highest level in 14 years on Tuesday, after strong manufacturing data were announced. Oil is cheaper than it has been for most of these past 14 years, and U.S. consumer confidence also just hit a 15-year high. If we connect these dots – a strong U.S. dollar, confident American consumers and cheap oil (which translates to cheap jet fuel) – this could be a strong season for U.S. travel, and for U.S. airlines.
To see whether we can find an attractive investment in the airline industry, we look at analyst projections for some basic airline-specific metrics of U.S.-based carriers.
- First we look at passenger load factor. This is the number of passenger-miles travelled as a percentage of the total available seat-miles (ASM). This may sound complicated, but in essence it simply measures how full a typical flight is, and we require that at least four in five seats be filled.
- Next, we consider the top line and look at revenue per ASM. This is the amount of passenger revenue generated per available seat-mile, and we require a minimum of 8 cents.
- Finally, we consider operating efficiency, in this case measured by cost per ASM. This is the operating expense per available seat-mile and we exclude any company with a value greater than 13 cents.
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What did we find?
The screen yields eight airlines, ranked by market capitalization. The first three are large-cap, blue-chip stocks that should be familiar to most investors. Delta Air Lines and United, as major international airlines, are also well positioned to capitalize on the potential trend identified earlier – an increase in Americans travelling abroad due to the strong U.S. dollar.
The smallest company that made the screen – SkyWest – is probably a riskier investment, but with more upside potential. In December, SkyWest terminated an agreement with Bombardier on 76 aircraft, and in the settlement Bombardier agreed to pay SkyWest $90-million (U.S.) by January. Immediately following this announcement, Deutsche Bank raised its price target on SkyWest from $34 to $42.
Investors are encouraged to do their own research before investing in any companies listed.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.