Airline stocks are flying high. As of press time, they were up by at least 15 percent in the year to date, according to Morningstar. International Air Transport Association (IATA) expects profits for North American airlines to rise to $4.4 billion in 2013—up by nearly 100 percent from 2012.
Savi Syth, who covers the industry for Raymond James, says you still can profit in this industry over the next 2–3 years. Syth believes that you should watch three things: projected changes in gross domestic product (air travel rises when GDP rises, and vice versa), the price of Brent crude oil (which determines fuel prices), and changes in available seat miles. (Seat miles are a measure of capacity that are found in a company’s financial statements.) Syth says that if available seat miles grow at a rate that’s above GDP, that’s a red flag for large carriers, because lower capacity translates into a better profit margin. It isn’t a red flag for smaller carriers, she says, because their smaller base makes any percentage increase seem large.
Syth recommends Alaska Airlines (Nasdaq: ALK; Price: $62.78) for its low price-earnings ratio and strong management. She says Delta Airlines (NYSE: DAL; Price: $23.32) also has a positive outlook because of its debt reduction and stronger position in the New York business travelers’ market. One of Syth’s favorites is Copa Holdings (Nasdaq: CPA; Price: $140.23), which owns Panamanian carrier Copa Airlines, because the company’s operating-profit margin is at least three times the industry average of 5.4 percent.