Investors Get More Interested in Airlines

It’s three weeks into the new year and airline stocks are on a tear. Shares of the new American Airlines Group (AAL), now the world’s largest carrier, closed at a new high of 30.02 to end last week, while Delta Air Lines (DAL), Southwest (LUV), andJetBlue Airways (JBLU) have all touched 52-week highs during January. United (UAL) trades just below that mark.

The Bloomberg U.S. Airlines index has gained 13.6 percent through Friday’s close—having surged 82 percent over the past 12 months—in testament to the industry’s turnaround over the six years since a global recession and a spike in jet fuel prices. “The market finally seems to be rewarding the stocks,” Wolfe Research analyst Hunter Keay wrote last week.

The last big transaction to consolidate the industry into four big players was completed last month with American and US Airways closing their merger on Dec. 9. In the weeks since, analysts have grown increasingly bullish on the entire group because of robust holiday traffic and fares that are moving steadily higher, setting up airlines to be consistently profitable and return cash to shareholders. “Institutional investors are kind of getting convinced because of consolidation that things are going to be a lot better for these guys,” says Michael Derchin, a long-time airline analyst and managing director at CRT Capital Group.

Airlines have also managed to become profitable during a weak recovery and moribund job market—and with crude oil prices consistently over $100 per barrel. “One of the things that has given investors some confidence, besides consolidation, is that they’re doing it in a very high fuel cost environment, whereas in the past, high fuel costs would have buried these airlines,” Derchin says.

Despite the gains, airline shares trade at a discount to other industries, just over 13 times future earnings, compared to a 15.6 multiple for the Standard & Poor’s 500-stock index. “If you look at what airlines could be earning in 2014 and 2015, they’re low multiple stocks and have the potential to expand, especially United,” Don Hodges, founder of Dallas-based Hodges Capital Management, told Bloomberg News. (The firm owns United shares.)

Delta kicks off the airlines’ earnings reports on Tuesday, and hopes are high. “It should be a great quarter” for the entire industry, Becker wrote in a recent client note.


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