Airline Stocks: Big is Bad, Small is Good

Posted by

January 15, 2009

There’s no better arbiter than actual results, which is why you may want to steer clear of large cap airline stocks and wade into the smaller ones.

Bottom line - the ‘majors’ like Delta (DAL), Southwest (LUV), American (AMR) and the rest of the big carriers were unprofitable for their last reported quarter; most were unprofitable for the entire year.

High oil prices are the culprit, right? Maybe, but high oil prices didn’t seem to be a problem for the smaller (and some foreign) arilines like Alaska Air (ALK), Ryanair (RYAAY), and SkyWest (SKYW). And don’t forget, oil prices dropped - precipitously - starting in July, so it should have been that tough to handle it. [After all, it was the passenger 'surcharges' paying the extra fuel costs.]

Those three smaller or regional airlines I mentioned all posted an operating profit last quarter, and 2 of the 3 posted a net profit. The third one may have been able to post a net profit had it not been for their fuel cost hedging losses.

The article I wrote for Investopedia offers all the details and any actionable ideas. Plus, there are some stunning performance stats to go along with the recommendations.

What I didn’t get a chance to say in the article was that the majors are indirectly telling is there’s simply too much bloat (high-priced, non-productive employees) being carried. Obviously it is possible to run an airline profitably, as seen with the smaller regional names. In fact, on a relative basis, smaller outfits should actually be dealing with higher expenses (airport access fees, fixed overhead costs, etc.). There’s more to their problems than just oil prices.

Anyway, you can check out the Investopedia article “Smaller Airline Stocks Are Taking Off” here.

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