Analysts and casual investors alike have waxed and waned on the value of airline stocks. Between bankruptcies, rising fuel costs, and a recession, it can be tough for shareholders to get a grip on growth opportunities in this maligned sector. However, smaller companies Spirit Airlines
Surviving an up-and-down industry
Allegiant and Spirit operate as low-cost carriers, ferrying passengers to and from destinations at the lowest possible prices. By reducing base ticket prices, these two airlines have catered to a recession-hit market with a need to travel but little money to do so. What Wal-Mart did for retail, these two did for commercial flight; their travel conditions may not be glamorous, but they're basic and cheap.
Industry conditions certainly haven't made it easy for Allegiant and Spirit. Fuel-price volatility has sent cautious investors scrambling for cover, and the latest tensions over Iran and Syria have only exacerbated the situation. With fuel prices averaging more than 35% of airline operating expenses, any unexpected commodities jump sends severe quakes through the entire industry.
Actual prices did jump by $0.64 a gallon in 2011, sparking fears of thrifty consumers abandoning air travel en masse. Said fears didn't pan out; domestic air travel grew by 10 million passengers in 2011, and by 5 million passengers through the first four months of 2012 against a similar period last year.
Allegiant and Spirit may not have the most consumer-friendly means of earning a profit during these tough industry times, but their nickel-and-dime business models have succeeded regardless. Both carriers buck industry trends and charge passengers for a first checked bag, with subsequent bag fees ramping up considerably in price.
Furthermore, Spirit and Allegiant have led the way in the airline industry in charging for carry-on bags that don't fit under the seat. Securing a space in an overhead compartment can quickly drain a passenger's wallet on these carriers; Spirit will hike its carry-on charge to a dizzying $100 in November. Spirit even charges for such fees as printing boarding passes at the airport; that'll cost $5, please.
Plenty of consumers and media reports have noted these outside-the-box profit strategies with particular disdain, but mixed public reaction hasn't shaken the solid financial performance of Spirit and Allegiant. Such non-ticket fees made up more than 33% of revenue for Spirit in 2011 and 27% for Allegiant, the top two totals in the industry in 2011. This isn't a passing fad -- these charges have increased by 66% for the airline industry from 2009 to 2011 as part of an evolving business model.
Financial strength in tough times
Passengers haven't shied away, however, despite the grumbling. Spirit's and Allegiant's financials have never looked better. The former boasts an impressive year-over-year quarterly revenue growth of 25.5%, with the latter holding a still-promising 15.3% growth.
Compared with their industry peers, both airlines look golden.
Net Margin (TTM)
Long-Term Debt/Equity (MRQ)
Return on Investment (TTM)
Southwest Air Lines
Sources: Yahoo! Finance and Motley Fool CAPS. TTM = trailing 12 months. MRQ = most recent quarter.
Delta holds the highest long-term debt in that group, with its LTD/E ratio hidden by negative equity. Spirit's complete lack of long-term debt looks positively splendid by comparison, and Allegiant's and Spirit's margins are nothing to sneeze at when placed side-by-side with the mediocre results of Southwest and Delta.
Despite Spirit's and Allegiant's questionable pricing schemes, it's impossible to miss the dramatic rise of these two low-cost carriers. Both stocks flirted with all-time highs recently but show no signs of slowing down. In a sector with as much turbulence as the airline industry, Spirit and Allegiant have defied expectations and have their shareholders flying high on cloud nine.
Spirit and Allegiant have triumphed despite a troubling few years in the industry, but rising oil prices should put a pause in any airline investor's step. To check out three great hedges against oil gains, take a look at The Motley Fool's free report, "3 Stocks for $100 Oil." It's important to keep your portfolio protected against the unexpected; grab your copy by clicking here.
Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.