A stabilizing industry
The overall picture in the airline industry this summer is one of stability. While jet fuel prices have risen somewhat in the past month, they are still comparable to last summer’s levels. Meanwhile, all of the major airlines expect to post modest but respectable unit revenue increases.
Investors should be cautious in this sector because valuations have risen substantially since late 2012. While the outlook for the industry seems positive, disappointment could lead to a sharp correction for any of these stocks. With that in mind, Delta Air Lines, Inc. (NYSE:DAL) still seems like the best investment candidate among major airlines, even after reaching a new 52-week high last Friday. Delta Air Lines, Inc. (NYSE:DAL) continues to post consistent, strong performance, and its cost-reduction initiatives provide further upside in 2014.
Southwest may also be worth a look for long-term investors. It is a contrarian play today, as the investment community seems more pessimistic about Southwest’s prospects relative to peers. Southwest is making slow but steady progress on the AirTran integration, and initiatives such as the move to a point-to-point schedule in Atlanta should boost results next year.
On the other hand, I would not recommend investing in United Continental Holdings Inc (NYSE:UAL) or US Airways Group Inc (NYSE:LCC) at this time. While United Continental Holdings Inc (NYSE:UAL) has gained a little ground on the industry in terms of unit revenue, its costs have been increasing much faster than rivals’ recently. As a result, it was one of the few carriers to post a year-over-year adjusted profit decline last quarter. Meanwhile, US Airways Group Inc (NYSE:LCC) is about to merge with American Airlines, which raises a variety of integration risks, offsetting the company’s strong performance.
The article Airline Demand Takes Off originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.