The airline sector has really taken off over the last six months, with nearly every major name posting big gains for investors. Of the four largest publicly traded airlines, US Airways Group Inc (NYSE:LCC) is a laggard even though shares have risen more than 40% since Thanksgiving; by contrast, Delta Air Lines, Inc. (NYSE:DAL) shares have nearly doubled. Last fall, any airline stock was a good stock to buy due to the sector’s remarkably depressed valuation.
After the recent airline rally, it’s harder to recommend investing in the major airlines. With the exception of Southwest Airlines Co. (NYSE:LUV), they all carry significant debt burdens and/or pension liabilities. Moreover, the major carriers all reported disappointing unit revenues last month, highlighting their continuing susceptibility to economic weakness.
However, there are still good stocks to buy in the airline sector, if you look a little further afield. Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE) are the two pioneers of the “ultra-low-cost carrier” concept. By keeping costs and base fares low, but charging fees for things like checked bags, carry-on bags, seat assignments, and onboard snacks and drinks, these companies have consistently achieved industry-leading margins. This positions Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE) for long-term earnings growth.
Allegiant Travel Company (NASDAQ:ALGT) and Spirit both have established track records of profitability, unlike many of their airline peers. This stability makes them better stocks to buy for long-term investors. Allegiant Travel Company (NASDAQ:ALGT) has been profitable for 41 consecutive quarters , while Spirit Airlines Incorporated (NASDAQ:SAVE) has been profitable for each of the last four years. In fact, neither company has been in much danger of losing money recently.
As the above chart shows, Allegiant has delivered double-digit pre-tax margins in each of the last four years, while Spirit only fell short of that feat in 2010. High margins provide a buffer, which can ensure that Allegiant and Spirit Airlines Incorporated (NASDAQ:SAVE) remain profitable despite volatility in economic conditions and fuel prices.
Furthermore, both companies have delivered strong earnings growth recently. Allegiant Travel Company (NASDAQ:ALGT) posted a 58% increase in EPS last year, allowing the company to eclipse its EPS record from 2009, when fuel prices were much lower. On average, analysts expect EPS growth of more than 30% at Allegiant this year. Meanwhile, Spirit grew net income by more than 40% last year, and is expected to post similar improvement this year.
A long track record of profitability, strong pre-tax margins, and earnings growth are all attributes sought by investors. For long-term investors, these characteristics could make Allegiant and Spirit Airlines Incorporated (NASDAQ:SAVE) great stocks to buy.
How do they do it?
While Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE) have different business models, there are a few common elements that unite them. First, the low-fare/high-fee structure takes advantage of human psychology (the “foot-in-the-door” technique) to get potential customers interested in a leisure trip before revealing how much it will actually cost after fees.