Second, they have focused on keeping unit costs as low as possible. Both carriers utilize dense seating configurations compared to other airlines, which reduces fuel and pilot costs per seat. Spirit reduces fleet costs through high utilization of its planes, while Allegiant minimizes those costs by buying used aircraft at a big discount. The result of these initiatives is a big cost gap between Allegiant and Spirit and the rest of the industry.
Third, Spirit and Allegiant have shown a willingness to drop underperforming routes. Since they do not utilize “hub-and-spoke” route networks, the two carriers have no temptation to maintain routes that are not meeting profitability goals. This is especially true because both companies have numerous expansion opportunities; there are plenty of new markets where “wasted” capacity could be profitably deployed.
Foolish bottom line
Allegiant and Spirit are two of the most promising companies in the airline industry. While both trade at a premium to other airlines — at 14.7 times forward earnings and 11.5 times forward earnings, respectively — they are still good stocks to buy because of their superior financial performance and significant growth opportunities.
Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE) have industry-leading cost structures, and have a consistent record of driving enough traffic through their low-fare offerings to make a nice profit. The only potential threat to them is a future start-up, as today’s competitors cannot compete with them on price. However, there is plenty of demand for low-cost air travel, so the possibility of new competitors entering should not be too worrisome. All in all, investors who buy these stocks today and hold them for at least five years are likely to achieve nice gains.
The article 2 Solid Airline Stocks to Buy originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Motley Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool owns shares of Spirit Airlines.
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