Republic Airways Holdings Inc. (RJET), SkyWest, Inc. (SKYW): A New Business Strategy for Airlines to Increase Profits

Airline stocks have outperformed the market after a long curse. It was not uncommon to think about airline companies as the worst possible investment ever. However, most of them have been rallying this year, easily outperforming the S&P 500. Republic Airways Holdings Inc. (NASDAQ:RJET) and SkyWest, Inc. (NASDAQ:SKYW) are two regional airlines of roughly the same valuation by market capitalization.

However, Republic Airways Holdings Inc. (NASDAQ:RJET) has rallied 90% year-to-date, while SkyWest, Inc. (NASDAQ:SKYW) has rallied 17%. We should discuss which airline may be positioned for bigger gains in the near future taking into account several metrics, most importantly aircraft- leasing contracts.

Regional airlines act as little giants

Regional airlines such as Southwest Airlines Co. (NYSE:LUV) have outperformed major airlines such as Delta Air Lines, Inc. (NYSE:DAL). However, Republic Airways Holdings Inc. (NASDAQ:RJET) has almost doubled its price per share in 2013. What’s more is that the company is trading with a P/E of 9.1, and a forward P/E of approximately 6.0, which could be considered cheap on valuation terms. Southwest Airlines Co. (NYSE:LUV) is trading with a P/E of 28.2, and Delta Air Lines, Inc. (NYSE:DAL) is trading with a P/E of 17.6.

I believe the Republic Airways Holdings Inc. (NASDAQ:RJET) should continue to bring capital appreciation to its shareholders. The company had a strong first quarter in 2013 according to its most recent earnings report. Although its total revenue declined 9% to $635 million in the period, a 31% decrease in fuel-related expenses offset the losses in revenue. Its net income rose 35% to $30 million. It was the first time in four years that the company had a profitable first quarter.

Further, it is important to mention that the company was able to decrease its debt load by $80 million on a year-over-year basis. The company finished the first quarter with approximately $1.8 billion in debt, or a debt/equity ratio of 3.4.

Looking ahead, the carrier is reducing costs of operation by selling aircraft. The company sold five airplanes and returned two more to lessors. Personally, I like Republic Airways Holdings Inc. (NASDAQ:RJET)’s business model because it is returning unnecessary aircraft, and this strategy saves enormous amounts of fuel. Its load factor will increase, and the revenue per flight will jump significantly.

In addition, Republic Airways Holdings Inc. (NASDAQ:RJET) is leasing aircraft as opposed to financing new aircraft. Financing aircraft is dangerous because usually the airlines get unfavorable interest rates due to the amount of debt they carry. However, Republic Airways should not have this issue, and it makes it more competitive against other companies. Hence, this company should offer substantial value in the future.