Airline stocks are traditionally thought of as poor investments because of the industry's rough track record for shareholder returns. But major changes have taken place in the airline industry that have resulted in fewer competitors, larger ancillary revenues, and greater profits than in decades past.
While investing in this industry is far from a guaranteed way to make money, three airlines do stand out for long-term investors' portfolios.
Leader of the major legacy carriers
Since its beginnings as a crop-dusting operation in 1924, Delta Air Lines (NYSE:DAL) has become one of the three large legacy carriers still in existence today. But this Atlanta-based airline has worked hard to position itself as the best of the large legacy breed.
For airline investors looking for returns and stability, Delta Air Lines may be the answer. The airline was the first among the legacy carriers to reinstate a dividend and stock buyback following the recession -- moves that wouldn't make sense if it weren't for Delta's other actions.
Debt reduction has been a key strategy at Delta, with the airline on track to reduce its $17 billion adjusted net debt from 2009 to only $5 billion by 2016. Not only does this reduce the airline's interest expense, but it can help to make borrowing easier if industry conditions require Delta to do so in the future.
But Delta has more up its sleeve than capital returns and debt reduction. The airline is known for seeking out unique strategies to boost revenues and cut costs in unconventional ways. Perhaps the best example of this was Delta's acquisition of the Trainer oil refinery, with the goal of cutting fuel costs.
Although the airline is still working out the kinks with its refinery, the move shows Delta's ability to think outside the box in an industry where staying inside the box has historically meant financial difficulty.
For investors looking for a U.S.-based airline with international reach and a relatively strong financial position, I see Delta Air Lines stock as a top investment candidate.
Will the profits keep on rolling?
It's tough to make a profit in the airline industry, but even tougher to sustain consistent profitability for decades. But Southwest Airlines (NYSE:LUV) has met this challenge and won with over 40 years of consecutive profitability.
For most of its history, Southwest was the small airline challenging its giant rivals with lower ticket prices as it broke into new markets. Today, Southwest is still expanding, but it has become a large carrier in its own right and frequently finds itself being compared with the larger legacy carriers.
But Southwest still differs from its rivals from a route network standpoint. While the major legacy carriers have large international networks connecting to their U.S. networks, Southwest Airlines operates almost all of its flights within the U.S.
However, international expansion is on the way. After Southwest's acquisition of AirTran Airways, it gained AirTran's Mexico and Caribbean network, pushing the airline outside of U.S. borders.
From an income perspective, Southwest has among the best record of any airline. Although its dividend is not as large as many income investors would want, the airline has paid a quarterly dividend for over 150 consecutive quarters.
In an industry where profits often prove elusive, Southwest has a decades-long track record of finding them and returning them to their shareholders. Investors looking for a safer pick in the airline industry should see if Southwest Airlines stock meets their investment objectives.
Ultra-discount air travel
As much as airline passengers complain about cramped seats and extra fees, they haven't stopped flying and are even helping to build an airline that could be the king of both. Spirit Airlines (NYSE:SAVE) fills the role of an ultra-discount airline, where passengers are given the ultimate no-frills experience for fares meant to compete with bus travel.
With only 28 inches of pitch (the distance from a point on one seat to the same point on the seat in front of it) in its economy class seats, Spirit Airlines has among the least space to stretch out in the industry. On top of that, the airline charges fees for such things as on board snacks and drinks, carry-on baggage, and printed boarding passes.
But the fact is, people like cheap air travel and are willing to endure the Spirit Airlines flight experience to reap the savings compared to flying on another airline. This has put Spirit in the position of being a growth airline. In an industry that is mostly mature, Spirit is pushing forward with new aircraft orders and plans for expansion.
At this point, it's unclear just how many of Spirit's customers will come from existing carriers and how many will be new flyers brought in by cheaper airfares. But for investors looking to benefit from a growth company and tap into the market of frugal travelers, Spirit Airlines stock could be a good pick.
As the airline industry reports larger profits, many investors are looking for which stocks make the best investments. Since each investor's goals are different, I believe it's worthwhile to look at Delta Air Lines, Southwest Airlines, and Spirit Airlines to see which of them best fits with your overall investment strategy.
Alexander MacLennan owns shares of Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. 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.