Airline stocks have been some of the best performers for investors in 2014, thanks to industrywide capacity discipline, careful cost management, and the recent oil price slump. The AMEX Airline Index rose nearly 50% for the year and some airline stocks even doubled.
Airlines may not have as much upside in 2015, but a few top airline stocks have plenty of room to run. JetBlue Airways (NASDAQ:JBLU), Volaris (NYSE:VLRS), and Virgin America (NASDAQ:VA) are three airline stocks that are likely to keep smiles on investors' faces in the coming year.
JetBlue focusing on the bottom line
In November, JetBlue laid out a long-term plan to regain its position near the top of the airline industry in terms of profitability. The company identified several new and ongoing initiatives that will bring in incremental revenue. This includes introducing a new fare class that will not include a free checked bag, adding 15 seats to each A320 aircraft, and completing the rollout of Mint premium service on key transcontinental routes.
JetBlue expects these initiatives to contribute $105 million in incremental profit in 2015. That's just a fraction of the long-term benefit. When all these initiatives are fully implemented (about five years from now), JetBlue expects to earn $450 million in incremental pre-tax profit.
For 2015, a bigger earnings catalyst will be lower oil prices. Jet fuel prices have fallen about 45% in 2014, with nearly all of the drop coming since the beginning of September. If prices remain near recent levels, JetBlue could save more than $500 million on fuel next year. Thus, it should be no surprise that analysts expect it to nearly double its EPS in 2015.
Volaris making a comeback
Mexican carrier Volaris is another airline that underperformed in 2014 but is primed for a comeback. The company is on pace to produce a low-single-digit pre-tax margin this year. The main cause of this poor performance was severe overcapacity in the Mexican air travel market in the first half of 2014.
Fortunately, supply and demand have been coming back into balance. Volaris has contributed to this recently by focusing all of its growth on the U.S. transborder market, where demand is stronger. As a result, its load factor increased year over year by 5.4 percentage points in October and by 7.0 percentage points in November.
This bodes well for Volaris reversing much of the 16.6% unit revenue drop that it experienced in Q4 2014. It will face easy comparisons in the first half of 2015, which should allow it to maintain its momentum.
Adding in the massive drop in jet fuel prices, Volaris has a recipe for boosting its pre-tax margin from the low single digits in 2014 to around 15% in 2015. Volaris is a fairly risky stock due to its inconsistent profitability, but it may well be the top-performing airline stock of 2015.
Virgin America has a successful debut
Virgin America went public just a month and a half ago, yet the stock has already nearly doubled from its IPO price of $23. Like other airline stocks, Virgin America has gotten a big assist from the recent drop in oil prices.
However, Virgin America is also benefiting from a maturing route network, as it has taken a hiatus from growth for the past two years. As a result, its unit revenue rose 4.8% through the first three quarters of 2014, following a 9.3% gain in 2013.
Going forward, Virgin America will benefit from new gates and slots that it recently acquired at New York's LaGuardia Airport, Washington D.C.'s Reagan National Airport, and Dallas Love Field. These three airports are preferred by business travelers due to their proximity to their respective city centers. This will provide margin-accretive growth in 2015.
More gains ahead?
Airline stocks have been some of the biggest winners of 2014, but JetBlue, Volaris, and Virgin America could give airline investors another great year in 2015.
Not only will they see big cost savings from the recent drop in oil prices, but each company also has some unique catalysts that should contribute to strong earnings growth in 2015 and beyond. In all likelihood, this earnings growth will bring stock price appreciation in its wake.
Adam Levine-Weinberg owns shares of Volaris, JetBlue Airways, and Virgin America and is long June 2015 $7.5 calls on Volaris. 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.