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Alaska Air Group, Inc. (ALK), Avis Budget Group Inc. (CAR): Three Ways to Play the Airline Industry

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Airline stocks have been in favor so far this year after being slashed in the 2000s. Airlines have experienced increasing passenger traffic and lower costs of operations due to more fuel-efficient aircraft. To take profit from the improving airline market, a basket of companies in different industries may be bought. This article presents three stocks that offer an interesting investment prospectus.

The airline

Most of the stage is shared between US Airways Group Inc (NYSE:LCC), Delta Air Lines, Inc. (NYSE:DAL), and United Continental Holdings. However, Alaska Air Group, Inc. (NYSE:ALK) may offer capital appreciation to its investors. The airline has an aggressive expansion strategy that has yielded substantial results. From a valuation standpoint, the company trades with a price-to-earnings ratio of 12.6, compared to the industry average of 31.9. It is not uncommon to see airlines submerged in debt, but Alaska Air Group, Inc. (NYSE:ALK) has a lower-than-average debt-to-earnings ratio at 0.6.

Alaska Air Group, Inc. (NYSE:ALK)

According to the latest quarterly earnings report, revenue increased by 9% to $1.1 billion, but net earnings declined 10% to $37 million. Overall, the company had an outstanding quarter because its revenue passenger miles (RPM) increased 9% to 6.7 billion. Further, even though its available seat miles (ASM) increased 8.7% to 7.9 billion, its load factor increased by 0.2%.

The company still offers potential for growth. It was awarded the highest customer satisfaction award from JD Power, and there is a positive correlation between customer satisfaction and loyalty, passenger traffic, and stock price. Also, the carrier has reached a tentative agreement with the 1,480 pilots that fly its aircraft. The possibility of a strike, which is particularly harmful to airlines, should be low and its costs of operation will not increase significantly.

The company shows growth potential by the inauguration of several routes. On Aug. 26, the carrier will begin to fly daily from Portland, Ore. to Atlanta, and on Sept. 16, the route Portland, Ore. to Dallas will be covered.

On Dec. 18 and Dec. 19, the carrier will commence flights from Anchorage, Alaska Air Group, Inc. (NYSE:ALK) to Phoenix and Las Vegas. The Anchorage, Alaska Air Group, Inc. (NYSE:ALK) to Las Vegas route will be beneficial because the company will not have to share revenue with other airlines in the alliance due to connecting flights.

Finally, the carrier started the routes of San Diego to Kauai, Hawaii and Portland, Ore. to Fairbanks, Alaska Air Group, Inc. (NYSE:ALK) on June 7 and June 8. The revenue from these routes should be reflected on the third quarter of 2013.

Overall, I believe that Alaska Air Group, Inc. (NYSE:ALK) still has much potential to offer to its investors in the long term.

Another way to play the rising airline industry

It is not uncommon for travelers to rent automobiles at destination airports. Car- rental companies should see rising demand for car rentals. Avis Budget Group Inc. (NASDAQ:CAR) provides car and truck rentals and ancillary services to businesses and consumers globally.

From a valuation point of view, the company trades with a P/E of 14.6, while the industry’s average is 24.4. One thing that may be troublesome is the large debt its balance sheet carriers, with a debt/equity ratio of 15.5. The reason for the large debt is the modernization of its fleet, and car rentals undertake this debt quite often. According to its most recent quarterly report, revenue increased 4% to $1.7 billion. However, its net income resulted in $46 million loss.

On the bright side, the company should continue to grow. Revenue from rentals in North America rose 6%. Further, the company has completed the acquisition of Zipcar, the world’s leading car-sharing network. Further, the company should decrease its debt with its program “Ultimate Test Driving.”

Customers may now purchase used vehicles at a fair price from Avis Budget Group Inc. (NASDAQ:CAR). The vehicle trading should be boosted now that the company has announced that the program will accept trade-ins. Avis Budget Group Inc. (NASDAQ:CAR) will take trade-ins at a considerably cheap rates. Not only will it profit from the used car it sells to the customer, but also the revenue from the trade-in car will be substantial once the vehicle is sold. Auto dealers also accept trade-in vehicles because their revenue increases by acquiring the vehicle from the customer at undervalued prices, and later selling it for a huge profit.

Finally, the company has a partnership with Spirit Airlines Incorporated (NASDAQ:SAVE), where members of “Free Spirit” can save money when they rent from Avis Car and Budget Car Rental. Plus, they will get additional miles in their accounts. This partnership will be significant in coming quarters.

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