Why Don't Investors Love Airline Stocks?


Much of my career as an equity research analyst was spent analyzing and understanding the transportation sector, and my best mentor was also an airline analyst - so naturally, I'm pretty biased when it comes to these stocks. However, airlines are one of easiest industries to understand yet so few portfolios contain one.

Why?

It isn't like they are extremely volatile at the same level of tech stocks. They are not high risk like pharmaceuticals. They can fluctuate like many consumer stocks, yet airline tickets are constantly being bought every day.

As often as Waste Management picks up a bag of trash from the curb, someone else is shelling out a few hundred dollars for a flight from L.A. to New York. The industry is huge and always being used so it was mind boggling to me why so few investors diversified their portfolios by including an airline. Even my uncle, who had great portfolio diversification, was surprised when I asked him why he had never bought an airline for exposure to the transportation sector. He simply gave the answer that most people say when I ask the same question: it just never occurred to me that I could make money in those stocks.

Well let me tell you - they CAN!

Airlines are heavily reliant on the price of oil to determine forecasts and profitability. Since the price of oil has tanked in the last year, and since new reports suggest that Iran will begin flooding the energy market with more cheap oil, it is clear that prices will remain low for a long time. Airlines often mark-up ticket prices to reflect changes in fuel expenses. Oil prices are low, yet you don't see airline seat prices dropping drastically. What does this mean? They are pocketing more money since their profit margins are growing: revenues are finally drastically larger and expenses are shrinking.

So higher revenues not only allow the company to grow its business, but it also means higher dividends and better stock prices for consumers! Yay! It is discouraging when you look at a chart (see below) of the Airline Sector ETF (JETS) as the price has drastically pulled back. However, this is not a time to panic, but a time to get excited - global markets are rough and this is impacting all stocks. Get ready to think about adding an airline to your retirement and brokerage accounts. Which airlines do you fly most often, which do you like to fly, and which have you heard good things about?

Keep in mind that there are many factors that impact the quality of an airline - not just the friendliness or rudeness of the flight attendants. Be open-minded in your stocks!

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