DALLAS — You just spent a small fortune on airline tickets for your family’s summer vacation. All your flights were packed with other passengers who also paid richly for the ride.
No wonder airline profits are sky-high.
Back home now, you might ask if you can share in the airlines’ good fortune by buying their stock. The answer: Maybe you can, but you missed the big payoff.
Airlines have been among the strongest stocks so far in 2014, easily beating broad measures such as the Standard & Poor’s 500 index and the Dow Jones industrial average. Since late 2011, when speculation sprouted about a merger between American Airlines and US Airways, the Arca airline index has soared 186 percent. During that time frame, Delta Air Lines Inc. shares have risen fivefold, Southwest Airlines Co. shares have more than quadrupled, and United Continental Holdings Inc. has nearly tripled.
In the same period, the S&P 500 rose 68 percent, and the Dow gained 48 percent.
Savanthi Syth, an analyst with Raymond James, said that investors considering airlines must keep expectations in check.
“The bear case would be that the big improvements are done, and earnings growth is going to slow,” she said, noting that it will be hard to repeat the returns of the last two years unless the economy booms.
Analysts who have seen their longtime faith in the airlines rewarded during the past two-plus years say this is no time to sell.
“If you look at airline stocks against other transports or other industrial stocks, the valuation is still comically low,” said Hunter Keay, an analyst who tracks airline stocks.
He says that Delta and some others still have low price-earnings ratios. That’s because investors aren’t sure that the airlines will remain profitable for the long haul.
“The airlines still haven’t really been tested by another crisis” such as another huge spike in fuel prices, Keay said, and until they are, investors naturally will be skeptical.
The biggest threat to the airlines’ rally, besides a slump in the economy or the broader stock market, is the fear that they would add too many flights too soon, leading to a glut of seats and triggering fare wars. When such concerns emerged this summer, particularly with routes between the U.S. and Europe, the stocks slipped. The airlines ratcheted down their plans to expand trans-Atlantic flying by this winter, and the concern about overcapacity evaporated.
Mergers have left four companies — American, United, Delta and Southwest — controlling more than 80 percent of the domestic market. That has led to fewer price wars and kept airfares and revenue rising.
