1 Airline Stock That's Actually Soaring

Airline bankruptcies are like celebrity divorces: They're only surprising when they don't happen. We were reminded of this last week when American Airlines' parent AMR (NYSE: AMR  ) filed for Chapter 11, bringing the total number of industry bankruptcies since 1990 to 189. Wow, that's a lot! Can anyone make money in this business?

Actually, yes. Alaska Air Group (NYSE: ALK  ) has managed to buck the trend that's put so many of its competitors in the poorhouse.

A break in the fog
Though Southwest Airlines (NYSE: LUV  ) has become a darling of customers for its low fares and zero bag fees, Alaska is the one who's been pleasing its shareholders in an industry that's been woeful since deregulation in 1978. Even before post-9/11 problems such as increased security, fear of flying, and rising fuel prices, airlines struggled to make a profit. Heavy competition, high union membership, consumer price sensitivity, and federal regulations, among other issues, continually plague the industry.

Since hitting bottom at $11.80 in July 2008, however, the west coast provider has gone up about six times in value. The numbers below help explain how Alaska continues to do well in this traditionally terrible industry.

Company

Net Income Margin

Return on Assets

Debt/Equity

Alaska Air Group 5.8% 5.9% 110.1%
AMR (4.2%) (0.5%) N/A
Southwest 1.1% 3.2% 64.9%
Delta (NYSE: DAL  ) 1.3% 2.6% 1,195.8%
Jet Blue (Nasdaq: JBLU  ) 1.7% 2.9% 179.1%
US Airways (NYSE: LCC  ) 0.6% 3.5% 2,811.9%
United Continental (NYSE: UAL  ) 1.8% 5.2% 569.1%

Source: S&P Capital IQ. N/A = not applicable; AMR has negative total equity. All figures from last 12 months.

As you can see from the chart, Alaska is the leader in net margin and return on assets. These are important figures because they show how much more profitable Alaska is compared to its competitors, and that it's generating income from its assets more efficiently. Only Southwest beats Alaska in debt-to-equity -- meaning a smaller percentage of Southwest's funding is borrowed -- but Alaska has notably spent cash on share buybacks instead of paying down debt, buying $51.4 million in shares in the last four quarters.

How the west was won
Starting in 2006, Alaska began focusing on maximizing return on invested capital, a move that other airlines were slow to follow. The airline has also succeeded in smoothing out its seasonality, matching capacity to demand and reducing costs. Its specialization on a single region and consistent excellence in customer service have also helped it become the best-performing airline in its class.

It has won "Highest in Customer Satisfaction" in the traditional network carrier segment from J.D. Power and Associates for the last four years and was named "Top Performing Airline" in 2010 by Aviation Week Magazine.

The 10-K report further spells out its strategy: "We believe that concentrating our service offerings in a few key markets, including Seattle, Portland, Los Angeles and Anchorage, allows us to maximize our investment in personnel, aircraft, and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions." In other words, Alaska is wisely using economies of scale and brand power to build market share in its home region.

The company has also taken measures to fight rising fuel costs through financial hedges and investing in a more efficient fleet. Between 2006 and 2010, available seat miles flown per gallon improved by about 16% for Alaska Airlines, its principal subsidiary.

Have we reached cruising altitude?
After its supercharged rise from June 2009, Alaska's stock price has slowed of late, running flat over the last seven months.

Airlines are highly cyclical -- a rise in earnings one year hardly promises an increase in the next, and they are prone to a number of potent risk factors. Higher fuel costs made 2008 a year to forget. 9/11 sent the industry into a tailspin that it's still arguably recovering from. And just a simple downturn in the economy can keep revenues below breakeven as more passengers stay home.

So airlines are always a risky investment, but as Alaska proved in the last few years, a savvy investor can still benefit from a smart bet here.

The industry does have one more thing going for it, however -- operational leverage. On just an 11.3% increase in revenue from 2009 to 2010, Alaska more than doubled its earnings. The same fixed costs -- capital expenditures, gate fees, and union contracts, among others -- that drown the industry in red ink during bad times mean that in good times a large chunk of that new revenue goes straight to the bottom line.

What, no peanuts?
2011 has been a tougher year on airlines than 2010, and Alaska's net income from the last two quarters is off from its 2010 levels. But share prices measure future prospects, after all, and Alaska's rise has generally tracked with its growth in earnings. Its trailing P/E is still low at 10.6 with a forward price-to-earnings ratio of 7.7, meaning decent earnings growth should push the stock price higher.

If you're not too pessimistic about the direction of the economy and think fuel prices will stay in check in the near future, Alaska could prove to be a winner for you.

Since airlines are particularly susceptible to news events and macroeconomic factors, you'll want to keep a close eye on any developments. Add any of these companies to your Watchlist by clicking below.

Fool contributor Jeremy Bowman does not own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2011, at 12:04 PM, 231545 wrote:

    And I thought you were going to say "American."

    The stock has quadrupled since the day after the bankruptcy announcement.

  • Report this Comment On December 07, 2011, at 5:03 PM, TMFSpiffyPop wrote:

    Agreed. On fire! Up 59% just today?!

  • Report this Comment On December 07, 2011, at 6:17 PM, TMFCheesehead wrote:

    Oh man, and I red thumbed it yesterday :(

  • Report this Comment On December 07, 2011, at 8:42 PM, 231545 wrote:

    Can you TMF guys give a good reason for an airline in bankruptcy to have its stock appreciate so much?

    What are the odds that the stock becomes worthless when the reorganization is complete?

  • Report this Comment On December 07, 2011, at 9:58 PM, ohsy wrote:

    When AMR filed Chapter 11 three days ago, the stock ended at $.26. I wanted to buy the stock for it is American Ailines with 4 billions in cash to wiggle out of chapter 11. What you wrote in your column was "Don't even think about buying it for any buyers will lose all" Hey Fool, do you see what is happening? You are indeed a fool really a dumb who doesn't know about the market and AMR.

    I regret taking your stupid advice.

    ohsy@buffalostate.edu

  • Report this Comment On December 08, 2011, at 11:39 AM, TMFHobo wrote:

    My best guess on why AMR has shot up in the last few days...

    Like other penny stocks, the volatility can be huge since there is basically no intrinsic value to go off of. No one is buying it to hold - they're just looking to make a quick strike. That's why the volume is so high.

    It's running on nothing but momentum (and some misguided hope that the stock won't end up worthless) - just another example of how irrational the market can be.

    If you want to test your luck, be my guest but the stock is down 28% today as I'm writing this.

    -Jeremy Bowman

  • Report this Comment On December 08, 2011, at 2:07 PM, XMFTheGuruEbby wrote:

    I don't think advising against AMR was bad advice, especially since I was one of Fools that did so. (http://bit.ly/sz0JrD - if you're interested)

    While the stock has a bit of value now, once the bankruptcy really gets going, the shares currently trading will become worthless. Pre-bankruptcy GM stock traded for a long time, albeit under a different ticker, before GM re-IPO'd last year.

    As mentioned previously, most of the people that are buying the stock are trying to capitalize on the short-term volatility. I would wager a guess that most of the buyers/sellers are not planning on holding onto the stock long-term.

    Robert Eberhard (TMFGuruEbby)

  • Report this Comment On December 30, 2011, at 11:49 AM, jademonki wrote:

    alaska airlines has little competition. I've heard that Southwest is moving into Alaska however. After purchasing 20 billion in new planes a few weeks ago this might actually be happening. If it does this will be a huge blow to ALK's market share.

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