US Airline Industry
The importance of in-depth market analysis can be illustrated when you check out the US airline industry.
Looking Deeper into the US Airline Industry Makes Smaller Players Seem Attractive
The stock market can sometimes be tricky. A good deal of in-depth market analysis is needed to analyze the present and future of a particular industry or sector in order to make winning decisions. An example is the current state of the US airline industry.
Big US Airlines Struggling in the Midst of Competition
The airline industry in the United States has been transformed by consolidation in the past decade, with four of the largest airlines controlling over 80% of the market. But the fierceness of the competition has caused two of these airlines, United Continental ($UAL) and American Airlines ($AAL), to report significant declines in earnings this year. Motley Fool’s Adam Levine-Weinberg believes that these airlines could continue to struggle with declining profits in 2018 since oil prices are keeping on rising.
Smaller Airlines Are Probably Better Placed
But Levine-Weinberg also points out that the same can’t be said of the smaller airlines in the industry. That’s because their cost structures are more efficient than these bigger players. And, being smaller players, they have significantly more room for growth. Though the larger airlines charge higher prices, the smaller ones have been found to provide better service many a time.
In fact, most of the airline stocks have gone the beaten down path in the past year. Rising costs are among the contributory factors. There has also been decreasing unit revenue, which is the measure of revenue adjusted according to changes in the flying duration of an airline.
Levine-Weinberg takes all these factors into account and reckons that Alaska Air ($ALK), Spirit Airlines ($SAVE), Hawaiian Holdings ($HA) and JetBlue Airways ($JBLU) are quite attractive stocks currently. He also believes these stocks could possibly increase their value by twice or even more in the coming three to five years.
An Example from Alaska Air
Now let’s analyze the reasons why this Motley Fool analyst strongly thinks so by looking at an example from one of these smaller airline stocks:
Alaska Air had managed to soar up to $100 earlier this year. This was the result of a great deal of excitement regarding Alaska Air’s acquisition of Virgin America. But that excitement has fizzled out and shares traded recently at only around $62. That’s because the Virgin America acquisition deal didn’t take place in as smooth a manner as expected. Unit revenue had an 8% fall on the Virgin America routes in the past quarter, which resulted in Alaska Air’s profit margin declining significantly. According to Alaska Air’s guidance, the company’s margins could further decline in Q4.
However, Alaska Air can solve these problems and that’s what investors aren’t counting upon. There is currently some aggressively competitive behavior in certain markets. But the management is planning many steps in markets that are underperforming, and capacity cuts are among these options. The airline has only managed to grab a fraction of the expected merger synergies. The management believes that $36 million of the total $300 million in synergies would be accrued in 2017. And the real benefits of these synergies will be realized when both the airlines migrate to single reservation in spring next year.
As of now, Alaska Air is trading for below 10 times forward earnings. Levine-Weinberg reminds that it’s a significantly low amount, since the company has significant growth opportunities and in the coming few years can grab over $250 million in terms of incremental merger synergies.
Such in-depth market analysis is something that comes with experience, but till then you can rely on efficient trading software to give you a clear picture of the markets for online stock trading.