The renaissance of America's legacy carriers has been a major story in the investing world over the past year. However, based on recent performance, it looks like those carriers may not be the best positioned for success in the year to come.
The legacy carriers rely heavily on corporate travelers who are willing to pay big bucks for last-minute travel arrangements and premium seating. By contrast, low-cost carriers and ultra-low-cost carriers -- such as Southwest Airlines (LUV 0.97%), JetBlue Airways (JBLU 4.10%), Spirit Airlines (SAVE -1.95%), and Allegiant Travel (ALGT 0.83%) -- are geared more toward leisure travelers.
This latter group of airlines have posted better unit revenue growth than the legacy carriers recently. This suggests that the leisure travel market may be improving, relative to the business travel market. If this trend continues, these companies' stocks will outperform their legacy peers.
An impending shift?
When the business travel climate softens, legacy carriers are usually the first ones to feel the pinch. For example, in April, the government sequester and FAA cutbacks led to a year-over-year drop in unit revenue among all of the top carriers.
So far, legacy carriers are still making unit revenue gains. Last month, unit revenue growth at the four big network airlines ranged from flat at United Continental to a 6% increase at US Airways. However, the looming debt ceiling issue and the partial government shutdown are both likely to dampen businesses' appetites for travel spending. As a result, the legacy carriers could see unit revenue growth deteriorate in the remainder of 2013.
Leisure carriers jump ahead
Leisure travel demand is typically much less sensitive to the economic climate than business travel. As a result, leisure-focused airlines may be better positioned for the next year than legacy carriers. A slew of recent data from low-cost carriers and ultra-low-cost carriers supports this supposition.
Southwest Airlines is the leading low-cost carrier in the U.S.
Low-cost carriers Southwest and JetBlue posted strong unit revenue growth last month, easily overshadowing the legacy carriers' gains. Passenger revenue per available seat mile increased 7%-8% year over year at Southwest and increased 9% year over year at JetBlue.
The ultra-low-cost carriers, which rely even more heavily on leisure travel, posted equally strong performances. Spirit does not report unit revenue on a monthly basis, but pointed to strong close-in bookings in Q3, which drove an 8%-9% increase in passenger revenue per available seat mile, or PRASM, for the full quarter.
Spirit Airlines has been growing rapidly, driven by strong demand for affordable plane tickets. Photo: Spirit Airlines.
Meanwhile, Allegiant reported a 5.9%-6.3% increase in PRASM for Q3, despite the temporary havoc caused by a maintenance issue that forced numerous flight delays and cancellations last month.
Ready to outperform?
While legacy carrier stocks have posted phenomenal gains over the last year (for the most part), the tables may be turning. Currently, leisure travel demand seems to be stronger than business travel demand, and that favors airlines like Southwest, JetBlue, Spirit, and Allegiant.
All four of these carriers have achieved better revenue results than the legacy carriers recently. Moreover, they are likely to experience less damage than legacy carriers from the ongoing government stalemate. As a result, for investors looking for exposure to the airline sector, leisure-oriented carriers may be the best opportunity going forward.
