How we got here and where we’re going
Frontier Airlines parent Republic Airways Holdings Inc. (NASDAQ:RJET) misses out on a perfect score primarily because profit started from a lower point (virtually zero) than did free cash flow. Today, it’s not only one of the best-performing airline stocks of recent years, it’s also one of the cheapest. Only US Airways Group, Inc. (NYSE:LCC) has a lower single-digit P/E than the 8.8 Republic currently sports, and every other low-cost carrier is at least twice as pricey, if not three times as pricey. But does current cheapness translate into a long-term value, or are these backwards-looking metrics deceptive to forward-thinking investors?
It’s been a bit over two months since my fellow Fool Sean Williams pointed out that Republic, despite its low price, was booking fewer passenger-miles in 2013 and could be set for a fall. Since then, Republic Airways Holdings Inc. (NASDAQ:RJET)’s shares have shed approximately 15% of their value. To counter the possibility of revenue declines, the airline joined Spirit Airlines Incorporated (NASDAQ:SAVE) and Allegiant Travel Company (NASDAQ:ALGT) last month in charging a fee for carry-on baggage, which is more or less the final frontier of irritating airline charges, short of charging you for the oxygen should those masks drop down during an emergency.
The difference between Republic (or, more specifically, Frontier, as Republic Airways Holdings Inc. (NASDAQ:RJET) itself isn’t implementing the policy) and its low-cost peers is that this is mostly a way to funnel ticket buyers to the Frontier website. Only tickets booked through Orbitz Worldwide, Inc. (NYSE:OWW) and other online agencies will carry this charge, and anyone buying tickets on the company’s site will avoid the fare. That could boost margins by cutting out the middleman, but it could also crimp sales, as Frontier Airlines is not that well-known nationally. Spirit’s own progress since instituting carry-on charges in 2010 shows that travelers are either willing to put up with them or simply too lazy to figure out the full cost of flying, since net income has grown at nearly double the rate of that company’s revenue over the past three years. On the other hand, Spirit still draws good business from having the lowest sticker price on travel sites and then tacking on fees later. It remains to be seen how Republic Airways Holdings Inc. (NASDAQ:RJET)’s version of this pricing tactic will work.
It doesn’t help that Republic is burdened by far more debt than its low-cost peer, and thus has less wiggle room to try new pricing strategies. On the other hand, Republic’s proposed spinoff of the Frontier brand could unlock new value for shareholders and actually provide a more consistent pattern of growth, as Adam Levine-Weinberg shows in his detailed analysis. There are differing ways to play this intriguing low-cost airline with the low share price, and based on the facts on the ground, there may be more than one way to find profit in the stock.
Putting the pieces together
Today, Republic Airways Holdings Inc. (NASDAQ:RJET) has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy — or to stay away from a stock that’s going nowhere.
The article Is Republic Airways’ Stock Destined for Greatness? originally appeared on Fool.com.
Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology.The Motley Fool owns shares of Spirit Airlines Incorporated (NASDAQ:SAVE).
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
