Air travel has become the preferred form of long-distance travel for millions of people across the planet. With over 2.6 million passengers flying in and out of U.S. airports every day, it takes hundreds of airlines to meet the demand for air travel worldwide. Some of the largest airlines in the world are American companies, but many smaller operators are interesting investment opportunities too. Our picks for the best airline stocks include stocks from both large-cap and small-cap operators.
The airline industry is a tough place to do business. Pricing is extremely competitive and fuel costs comprise a huge portion of operating expenses. Even a small jump in jet fuel prices can have a huge impact on earnings. In most cases, airlines are working on razor-thin margins, and they encounter pressure from labor disputes. In fact, labor is the airline industry’s number-one cost, on average, so collective bargaining negotiations are a major part of the business. There’s a lot of operational uncertainty facing the average airline, so successfully investing in airline stocks is no simple task.
Best Airline Stocks for 2020
American air carriers are some of the largest airlines in the world. Shares of these larger airlines offer some of the best airline investment opportunities available to traders.
Delta Air Lines Inc. (DAL)
Delta runs both international and domestic passenger flights; maintaining a fleet of about 800 aircraft. It operates hubs at airports across the world that serve as the framework of their flight offerings. Delta also provides maintenance & repair services for aircraft fleets.
The company is working on new products that it hopes will improve its margins, like premium lounges for high-paying customers. Its partnership with Air France, Virgin Atlantic, and KLM could also help Delta make its operations more efficient this year.
American Airlines Group (AAL)
One of the largest airlines in the U.S., American Airlines runs over 7,000 flights to more than 350 destinations in 50 different countries. American Airlines became the largest carrier in the U.S. when they absorbed U.S. Airways several years ago.
American Airlines Group has recently partnered with GOL, an airline company in Brazil. The partnership will open up 20 new destinations in South America, making it a massive deal for American Airlines Group. With such developments, American Airlines Group could be a great stock to consider for this year.
United Airlines Holdings (UAL)
With a fleet of over 1,329 aircraft, United Continental is one of the largest aircraft operators in the world. In addition to providing passenger flights to destinations around the world, United uses its mainline and regional operations to transport cargo. They also sell fuel, maintain aircraft, and provide ground upkeep services for third-parties.
SkyWest Inc. (SKYW)
Despite being a small-cap company, SkyWest is a major airline in the U.S. They currently operate 68 different routes utilizing 10 hubs that they lease through third parties, like Delta and American. The company makes a significant portion of its revenues through codesharing agreements – a common practice in the airline industry – in which SkyWest is paid to operate and maintain aircraft used on flights that are marketed and scheduled by a partner airline, like American and Delta.
JetBlue Airways Corp (JBLU)
JetBlue Airways, popularly known as JetBlue, is a major American low-cost airline. At the moment, it is the sixth-largest in the United States by passengers carried. Their headquarters is in New York but they maintain other offices in Utah and Florida. JetBlue offers flights to more than 90 destinations.
Their biggest attraction remains free inflight entertainment, free brand-name snacks and drinks, and lots of legroom. JetBlue’s stock has been performing well so far in 2020 following an interesting 2019. The increase in bag-check fees could factor into the performance of JetBlue this year.
Spirit Airlines Inc. (SAVE)
Spirit provides low-cost air travel for passengers flying within the U.S., Carribean, and South Americal. This airline is the seventh-largest commercial airline in the U.S., and its offering of low-priced fares has made it a favorite amongst frugal flyers. The airline runs about 600 flights daily to 72 destinations within and nearby North America.
Spirit Airlines is one of the fastest-growing airline companies in the world. it increased its capacity by 16.6% last year, and it plans to expand available seat miles by 17% to 19% in 2020. The extra capacity could improve margins and generate more revenues for Spirit.
Southwest Airlines Co. (LUV)
Southwest primarily runs domestic flights passenger flights services to 99 destinations in 40 different states. The company also offers international flights to a handful of destinations in the Caribbean and Central America, but it offers no transoceanic flights to Europe or Asia.
Small-Cap Airline Stocks
These smaller airline stocks have more inherent uncertainty than their larger counterparts, but they also can have greater growth potential than established airlines. These are the best airline stocks to buy if you’re looking for high-growth opportunities.
Alaska Air Group (AIR)
Alaska Air Group owns two domestic airlines: Alaska Airlines and Horizon Air. They also have an aircraft ground handling company, McGee Air Services.
The increase in traffic and capacity over the past few months could be vital in driving the company forward in 2020. If it maintains this momentum, it could be a promising small-cap airline stock to consider this year.
Air Transport Services Group, Inc. (ATSG)
Another small-cap airline stock you could consider is Air Transport Services Group. They are an aviation company that provides air cargo transportation and related services to air carriers. They also offer cargo services to companies looking to outsource.
Understanding the Airline Industry
Many investors look at the airline industry as a minefield. The sector had tons of bankruptcies between 1980 and 2000, so investors got gun shy about buying airline stocks.
However, regulatory changes over the past two decades stabilized the sector and allowed it to flourish. Numerous mergers and acquisitions have seen the aviation sector become one of the strongest in the country.
At the moment, airline companies usually deal with two significant issues: rising fuel costs and labor costs. As an investor, you have to consider a few things before you invest in this sector. During a recession, airline companies take a hit as companies schedule fewer business trips and people take fewer vacations due to costs. Thus, you have to consider the economic outlook before you invest in airline stocks.
Also, airline stocks are highly reactive to the prices of crude oil. A drop in oil price usually leads to an increase in the value of airline stocks as they get to enjoy a reduction in operational costs. As an investor, you also have to consider the possibility of acquisitions or mergers. The airline sector has seen one of the highest numbers of acquisitions and mergers in recent years. This is because companies in this sector realized they are more efficient when they combine.
Airline Industry Analysis
The airline industry faces uncertainties so significant that they make or break profits, but you can find good value in airline stocks if you do your homework. If you want to learn how to spot quality airline stocks, here are some performance metrics commonly used in the airline industry.
Available Seat Mile
(total number of available passenger seats) x (total number of miles flown)
This number is used to measure an airline’s capacity. It tells us the airline’s total revenue-generation capacity for the period in question.
Revenue Passenger Mile
(number of revenue-generating passengers) x (miles flown)
This figure tells us many paying passengers attended each flight per mile. When compared with the available seat mile, it shows how efficiently an airline is filling its flights.
Revenue Per Available Seat Mile
(total revenues) ➗ (number of available seats)
Revenue per available seat mile measures how well an airline is monetizing its available seats.
The most efficient airlines tend to be the most successful. Good operating margins give airlines more flexibility in the case of elevated costs. With higher margins, airlines can absorb increased costs and still turn a profit. Remember these three ratios when you are analyzing airline stocks so you can form a clear picture of each airline’s business performance.
Airline Industry Overview
Domestic airlines in the US have been experiencing an annual growth of 3.2% between 2015 and 2020. During that time, the market grew by an astonishing $146 billion. In 2020, experts believe the airline sector will expand by 0.7%.
The global airline sector expanded dramatically over the past two decades. In 2003, the total market size of the worldwide airline sector stood at $322 billion. However, it expanded by more than $500 billion since then to reach $872 billion in 2020.
The largest markets for air travel are the United States, Brazil, China, and the European Union, but the US lays claim to the busiest airport. Hartsfield–Jackson Atlanta International Airport, in Georgia, handles over 104 million total passengers each year. London’s airport system is also one of the world’s busiest by passenger count.
When it comes to annual revenues, US airlines still lead the way. American Airlines, Delta Air Lines and United Continental Holdings currently generate more revenue than other airline companies across the globe.
Airline Industry Trends
Mergers and acquisitions have become a popular trend in the airline sector. Companies realize that they are more effective when they combine their resources. Due to the mergers and acquisitions, the number of businesses in the international airline industry has dropped from roughly 260 in 2010 to 233 in 2020.
Low-cost carriers are also becoming more popular. Value flights have become more common because they are more affordable for passengers and they allow companies to service more locations. In 2016, the global low-cost airline market was valued at around $117 billion. That figure has been rising and is set to reach $207 billion by 2023.
These cheaper fliers are mostly passenger airlines that offer cheaper rates than traditional airlines. More companies are exploring the value flight space as an option to boost revenues and offer more flights.
Air Carrier Stocks: Closing Thoughts
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