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The 10 Biggest Airline Stocks

Humanity has long dreamed of flying, but one must imagine even Orville and Wilbur Wright would be in awe of the industry that has sprung up around the invention they first got airborne in December 1903.

Airlines have changed the way we do business and opened up new opportunities as they have made the globe smaller and more accessible. In 2018, the global airline industry carried 4.3 billion passengers and generated more than $800 billion in revenue, according to the International Air Transportation Association, up 6% and 9.4%, respectively, from 2017. A substantial share of that total is traveled on U.S. airlines, and an investor interested in buying into that growth (or at least recouping a small bit of what they spend annually on vacation travel) might want to take a look at U.S. airline stocks.

Before committing capital to airlines, it is a good idea to examine the lay of the land and get to know the different competitors vying to transport customers from point A to point B. Here's a quick look at the 10 biggest U.S. airline stocks, including a few names that might surprise you.

Image source: Getty Images.

Airline investing 101

Historically, airline stocks have been dangerous for buy-and-hold investors. The industry is known for its high fixed costs, including airplanes and skilled labor, and fluid demand that tends to ebb and flow with the business cycle. Airlines spend hundreds of millions of dollars on new aircraft, taking on considerable debt in the process, and then hope to sell tickets at a price that allows them to recoup the investment.

Most of the large airlines run what is known as a hub-and-spoke network, with flights from all over a region feeding into one central location. A traveler flying from Greensboro, South Carolina, for example, to Fargo, North Dakota, is unlikely to find a nonstop flight. But the traveler will have options, perhaps flying Delta Air Lines through its Atlanta hub or American Air Group through Charlotte, North Carolina.

The airlines have gotten better at making money through the business cycle -- a round of consolidation that cut the number of major airlines in half (leaving four) helped -- and have in recent years attracted the attention of high-profile former critics like Warren Buffett, who last decade swore off the industry but today owns shares of a basket of U.S. carriers through Berkshire Hathaway.

The companies still face a lot of factors beyond their control, ranging from the health of the U.S. economy and the price of jet fuel to issues with suppliers (like Boeing's high-profile grounding of its 737 MAX aircraft). But they also have stronger balance sheets than ever before and should have the wherewithal to survive even a prolonged economic slowdown.

The airline industry, once nearly uninvestable, is now an option for a buy-and-hold investor willing to dig into the financials and get to know the industry.

The 10 largest U.S. airlines

Airlines traditionally have fallen into one of four categories, and while the boundaries have blurred a bit in recent years, the designations still largely hold true.

Full-service airlines boast massive route networks and international partners designed to take you anywhere in the world and offer a range of cabin choices en route. Discount airlines provide fewer frills and usually fewer destinations but focus on low costs. Regional airlines offer outsourced lifts but rely on the full-service airlines for branding, marketing, and ticket sales. Contract carriers, which tend to be smaller and operate off the radar, fly mostly cargo and charter missions.

Here's a list of the 10 largest U.S. airline companies based on market capitalization (the total company shares multiplied by the stock's current market price):

Airline

Market Cap

Description

1. Delta Air Lines (NYSE: DAL)

$34.79 billion

Full-service

2. Southwest Airlines (NYSE: LUV)

$30.26 billion

Discounter

3. United Airlines Holdings (NASDAQ: UAL)

$22.73 billion

Full-service

4. American Airlines Group (NASDAQ: AAL)

$13.10 billion

Full-service

5. Alaska Air Group (NYSE: ALK)

$8.48 billion

Full-service

6. JetBlue Airways (NASDAQ: JBLU)

$5.35 billion

Discounter

7. SkyWest (NASDAQ: SKYW)

$2.94 billion

Regional

8. Spirit Airlines (NYSE: SAVE)

$2.55 billion

Discounter

9. Allegiant Travel (NASDAQ: ALGT)

$2.52 billion

Discounter

10. Hawaiian Holdings (NASDAQ: HA)

$1.28 billion

Full-service

Data source: Yahoo! Finance. Data as of Oct. 25, 2019.

Let's see where these companies fit in the industry spectrum and how they look as potential investments.

1. Delta Air Lines: The legacy leader

Delta Air Lines has emerged over the past decade as the driving force behind much of the change in the U.S. aviation market. It was among the first to fly into bankruptcy following the terrorist attacks of Sept. 11, 2001, emerging with a revitalized balance sheet that it used to kick off a round of consolidation when it acquired Northwest Airlines in 2008.

Since that time, Delta has continued to push aggressively. It was one of the first to revamp its pricing strategy to better compete with discounters that, for a generation, had been eating into domestic market share and profitability. Delta has had success in recent years by offering low fares to price-sensitive flyers but also by increasing revenue from less-sensitive business travelers via upgrades and other ticket add-ons. Currently, Delta generates about 50% of its revenue from its main-cabin passengers, down from a historical average of closer to 70% of revenue. It has made that change by offering more premium services.

A Delta A-321. Image source: Delta Air Lines.

The airline has a reputation for writing its own playbook. In 2012, for example, it responded to worries about a lack of affordable jet fuel in the northeast U.S. by buying a refinery in the region. More recently, Delta has been experimenting with a variation on a subscription service, perhaps tied to getting priority seating assignments or discounts on bag fees and other amenities, as a way to generate recurring revenue.

Delta is part of the international SkyTeam alliance along with foreign partners including Air France-KLM and Korean Air Lines. It has aggressively sought to lock in foreign partners by taking equity stakes in Aeromexico, China Eastern Airlines, Virgin Atlantic, and Gol Linhas Aereas Inteligentes.

2. Southwest Airlines: The discount pioneer

Southwest Airlines is the grandfather of discounters, formed in the 1960s (flying within Texas) and kicking off a nationwide expansion in 1979 after the industry was deregulated. No airline over the past half century has done more to disrupt the industry. Southwest, despite its low costs and few frills, has a well-earned reputation as a premium stock able to profit in good times and bad. Unlike most of the major carriers on this list, Southwest has never filed for bankruptcy protection.

The model has evolved a lot since the early days, and Southwest planes can now be seen far from their Texas base, landing in the Caribbean and flying to Hawaii. Southwest still differentiates itself with a lack of seat assignments and is one of the few airlines to not charge for luggage.

But the legacy full-service airlines are much more efficient than they once were and are no longer as vulnerable to Southwest cherry-picking key markets. The so-called Southwest Effect, a phrase coined by regulators in the early 1990s to describe the pattern of lower fares and higher passenger volumes that come as Southwest enters a market, seems to be fading.

A Southwest-branded Boeing 737. Image source: Boeing.

Southwest historically has kept costs low by relying on a single aircraft type, Boeing's 737, and the 2019 grounding of the 737 MAX caused schedule disruptions and temporarily cut into growth. But it also forced Southwest management to make some difficult but necessary decisions about the strength of some of its markets. That forced pruning should benefit the company for years, as it has allowed Southwest to allocate extra resources to the markets and routes that work best.

Today's Southwest is more a member of the ruling class of four top airlines that control nearly 80% of the domestic U.S. market than it is an outsider, but the company is still one of the lower-cost operators in the business and continues to generate consistent earnings growth.

3. United Airlines: Finally flying straight

United Airlines was a meandering giant through most of the 1990s and 2000s, plagued by seemingly continuous labor strife, poor management, and a bloated cost structure. The airline followed Delta into bankruptcy in 2002 and expanded its footprint by combining with Continental Airlines in 2010. But the airline, despite its massive U.S. network and unrivaled connections to Europe and Asia, continued to have a reputation as an underperformer.

That has changed in recent years under the leadership of CEO Oscar Munoz, who joined in 2015. United has slowly been catching up to Delta in terms of profitability and earnings power, in part by modernizing its scheduling and pricing strategies to better pursue the dual goal of attracting leisure travelers and higher-margin business traffic. The airline's hub in San Francisco, the international gateway for Silicon Valley, has been a feather in its cap in recent years and has helped drive business travel growth. It also has a hub in Houston that does well when oil prices are climbing.

Two questions that United investors now need to consider are how much of this turnaround in recent years was simply Munoz taking advantage of low-hanging fruit at an underperforming enterprise and how much of it is sustainable. The guess here is that the recent performance was a combination of both. United is much healthier than it has been at almost any time in the last three decades, and its operations are strong enough to power through the lows of the business cycle and generate strong profits at the highs. But the airline seems like a long shot to match or surpass industry leader Delta any time soon.

United is part of the international Star Alliance along with foreign partners, including Lufthansa, Air Canada, and Japan's All Nippon Airways. Star is the largest of the three major global alliances in terms of passenger counts, serving about 762 million passengers annually.

4. American Airlines: A work in progress

American is one of the oldest names in U.S. aviation history, but the airline that operates under that brand today is very different than the airline that once dominated the skies. American Airlines didn't file for bankruptcy until 2011, and by the time it did, the company had bloated costs and a crippled balance sheet due to multiple years of losses.

The airline was acquired out of bankruptcy by the much smaller US Airways, which itself had been acquired by discounter America West years earlier. Doug Parker -- who, as CEO of America West in the early 2000s, engineered first his company's merger with US Air and then later the bid to buy American Airlines out of bankruptcy -- remains at the helm of the company today.

An American Airlines 737 in flight. Image source: American Airlines.

American has flown through a lot of turbulence since that merger, in part due to the complexity of combining seniority lists and union contracts among three sets of pilots, mechanics, and flight attendants. The airline also took on a lot of debt as part of the merger process. In recent years, American has also been dinged by Boeing's 737 MAX issues as well as continued labor issues.

A common criticism of American in recent years is that the airline still operates with a discounter mentality, failing to follow rivals Delta and United in upgrading its in-flight experience and amenities and therefore falling behind in the global battle for business accounts. American also has a much higher debt load than its rivals. It's an issue the company is working to address that, for the time being, makes it potentially more vulnerable should the U.S. economy fall into a recession.

American is a member of the OneWorld international alliance along with foreign partners British Airways parent International Consolidated Airlines Group, Japan Airlines, and Qantas Airways.

5. Alaska Air: Regaining altitude

For years, Alaska Air Group carved out a profitable niche serving the Pacific Northwest and north/south California traffic, doing well in part by nurturing relationships with multiple larger airlines willing to feed Alaska customers to deliver to local markets. That both provided Alaska a steady stream of business and kept competition in its core markets to a minimum.

That model came under pressure as larger airlines consolidated and began to claim more turf for themselves, with one-time close partner Delta, for example, opening a hub at Alaska's Seattle base and increasing flights in the region. Alaska responded in 2016 by bulking up itself and acquiring Virgin America airlines. The deal was expensive -- Alaska had to outbid JetBlue Airways for the prize -- and saddled the company with $2 billion in debt and a difficult integration.

It took a few years, but Alaska appears to have finally gotten over the hump of integrating the Virgin America deal and is ready to soar again. Of late, the company has been rethinking the national ambitions it carried after the acquisition and is returning to its West Coast roots, shifting capacity by abandoning some of its underperforming transcontinental routes and adding it to secondary regional airports like Redmond, Oregon, Everett, Washington, and San Luis Obispo, California.

The idea is to focus on flights that have a substantial customer base on both sides of the route at the expense of flights to places where it has little exposure or brand loyalty to help sell tickets. As part of the process, Alaska is also rolling out a fare system to rival those of Delta and the other large airlines.

Alaska investors did very well in years past by sticking with an airline that served its home region well and commanded loyalty -- and pricing power -- from its local customers. The new Alaska Air is larger and more complex, and some of its erstwhile partners are now competitors in its home region, but the airline looks well on its way to once again becoming an outperformer.

6. JetBlue: Ready for a second act

JetBlue Airways was an overnight success when the airline debuted in 2000, using crisp, hip branding, a premium cabin experience at an affordable price, and the reach of the local media at its New York hub to quickly build a loyal following. The novelty eventually faded, and some of JetBlue's signature perks were borrowed by competitors, leaving JetBlue floundering.

Today's JetBlue is well into the company's second act, and the initial results are encouraging. In 2016, the airline began a campaign to cut costs by upward of $300 million annually, including by better automating maintenance and crew scheduling to gain efficiencies, and has revamped its route network to focus on markets in which it was generating higher revenue.

A JetBlue Airbus following a landing. Image source: JetBlue Airways.

JetBlue's Mint product, a rework of an airline's traditional first-class offering lie-flat seats and added perks on transcontinental and Caribbean flights, is a hit with customers. The airline is also in the process of rolling out a no-frills basic economy ticket class aimed at price-sensitive flyers, following the industry trend of trying to cater to bargain hunters and get added revenue from those who are willing to pay for amenities.

The airline is also looking to increase its international presence, teaming up with Norwegian Air Shuttle to offer its customers access to Europe and provide Norwegian passengers a connection to U.S. markets Norwegian doesn't serve on its own. JetBlue also has announced its intention to start flying to London from New York and Boston using its own planes in 2021, creating new opportunities but also considerable new risks. It's more expensive to fly internationally, and JetBlue, in heading to London, is taking on numerous entrenched competitors as well as encroaching on Norwegian turf.

It is going to be difficult for JetBlue to regain the industry-darling status -- and premium stock multiple -- it enjoyed soon after its inception. But the company in its modern-day form is a solid operator and a reputable competitor, with the added optionality of being one of the few reasonable acquisition targets flying in the U.S. if consolidation in the industry resumes.

7. SkyWest: Airline for hire

SkyWest is the biggest airline you've never heard of. While most of the airlines on this list spend billions annually to get their names and brands out in front of the flying public, SkyWest operates outside of the limelight by doing business under brand names like United Express, Delta Connection, and American Eagle.

SkyWest has a fleet of more than 475 small to mid-sized planes carrying more than 40 million passengers to more than 250 destinations under contract with bigger partners. As part of those contract agreements, the larger airlines cover marketing, ticketing, and other expenses for SkyWest in return for a fixed fee for flying.

The arrangement minimizes the risk for SkyWest but also limits its upside. Unions representing employees at the larger airline partners that SkyWest works with have clauses in their contracts limiting the size of the airplanes regional operators like SkyWest can fly as well as limiting the number of planes and the number of service airlines that Delta and United are allowed to farm out to third parties.

In years past, the regional portion of the aviation business was fraught with bankruptcies and failures. Larger partners would pit regional operators against each other and create a race to the bottom that would zap profitability.

A wave of consolidations and failures has taken away much of that excess capacity, and SkyWest (as the largest and most stable regional) now has some pricing power because of a lack of other viable options and SkyWest's reputation for being a stable and reliable partner. But investors should understand that, in the event of a prolonged downturn or financial distress at a major airline, it is the regional partners (not internal staff) that usually are targeted for the first cuts.

8. Spirit Airlines: The new wave of discounter

Spirit Airlines takes "no frills" to the extreme, introducing in the U.S. the "ultra-low-cost carrier" (ULCC) model that was first made popular in Europe. The airline is the leader of a second generation of rule breakers to enter the industry since the late-1970s deregulation.

Decades ago, Southwest Airlines proved you can be successful by cherry-picking routes and simplifying the product that an airline offers to its passengers. Spirit and other ULCCs have taken that model a step further, offering dirt-cheap fares and then charging customers for add-ons that were once seen as a part of the standard fare, including choosing a seat ahead of time, bringing carry-on luggage aboard, and receiving snacks and drinks.

It's a business plan that tends to make Spirit the target of a lot of jokes and customer complaints, but the model works (despite the griping). The fare structure has caught on with the subset of travelers who want affordable tickets and have no real need for add-ons. Spirit has also carved out a niche with business travelers needing last-minute passage at an affordable price.

A Spirit A-319 coming in for a landing. Image source: Spirit Airlines.

Spirit had been one of the industry's best growth stories in recent years until some 2019 stumbles. These included runway construction holdups at its Fort Lauderdale, Florida, hub and self-inflicted wounds like the airline's failure to put enough flexibility in its schedule to account for storm delays and other operational hiccups. Airline management claims to have learned its lesson from those issues, and results seem to back them up. But this remains a higher-risk, higher-reward growth story that's still prone to volatility.

Spirit is regarded as a "spill" carrier, an industry term that implies it is only able to fill its seats after competitors have sold out. But the airline's load factor, a measure of seats sold, has improved as it has grown and now consistently comes in above 84% occupancy.

The airline remains in growth mode. In late 2019, it announced an order for at least 100 additional aircraft. Those plans could come under pressure should the U.S. economy hit the skids. But so far in its history, Spirit has shown it has the flexibility to adjust to conditions and profit over time.

9. Allegiant Travel: More than just an airline

Allegiant Travel has always marched to the beat of its own drummer, spending most of its history flying older, more-affordable-to-acquire aircraft between second-tier airports that cater mostly to sun-seeking vacation travelers. For example, the airline flew from Grand Rapids, Michigan, to St. Petersburg, Florida, bypassing busier and more expensive airports in Detroit and Tampa.

The airline has modernized in recent years, transitioning to a fleet of newer, more fuel-efficient Airbus planes and entering tier-one markets like Ft. Lauderdale, New Orleans, and Los Angeles. But the airline has also continued to chart a unique path, launching a chain of family entertainment centers and investing $250 million to construct a luxurious resort on Florida's Gulf Coast.

Allegiant's new Airbus jet. Image source: Allegiant Travel.

Allegiant sees itself more as a diversified leisure company than simply a provider of transit to your destination. The company is wagering that it can use its customer data and loyalty programs to cross-sell family fun activities at home and while on vacation. With its all-new Sunseeker Resort, it hopes to generate revenue from becoming the actual vacation destination.

The jury is still out on the broader ambitions, but it is hard to argue against Allegiant's performance as an airline. Expenses have been pushed higher due to training and other costs related to the transition to an Airbus fleet, but Allegiant consistently puts up some of the top performance metrics in the industry.

Skeptics will argue that the nonairline businesses will eat into Allegiant's airline returns, and it is worth noting that tourism-focused carriers like Allegiant tend to perform worse than peers during an economic slowdown, but Allegiant has a track record that suggests this underdog should not be underestimated.

10. Hawaiian Holdings: A connection to paradise

Hawaiian Holdings, as its name suggests, has carved out a profitable niche by providing fliers access to a paradise-like setting and, importantly, providing Hawaii residents and visitors mobility throughout the state via its island-hopper service. The airline connects its home state to the U.S. mainland and destinations throughout Asia and the South Pacific.

Hawaii is an attractive destination and gets enough business to justify having its own airline. Alas, that demand also attracts significant competition. Hawaiian has always battled full-service airlines like United. Lately, it has faced new competitive pressure as discounter Southwest Airlines has introduced service there and has targeted Hawaii as one of its principal focuses for growth. Overall, Hawaiian execs expect competitive capacity to grow by 9% in 2019 alone, which will put pressure on airline margins.

Hawaiian's plan to counter that competition is to look to its west and south. The airline already has tapped into Japan's seemingly insatiable demand for Hawaiian vacations by offering service to that market. It also flies to Australia, New Zealand, American Samoa, and Tahiti, where competition is less intense. Hawaiian also plans to buy a fleet of fuel-efficient Boeing 787 Dreamliners with deliveries starting in 2021 to help it expand its Trans-Pacific network and operate more efficiently.

The airline in 2019 was dealt a blow when U.S. regulators blocked its application for antitrust immunity for a planned joint venture with Japan Airlines (JAL). The immunity, if granted, would have given Hawaiian and JAL the freedom to coordinate on schedules and fares and to pool revenues and resources, making the combined joint venture a competitive powerhouse in the Pacific.

Hawaiian has a strong franchise and should be able to manage through the competitive onslaught, but the company remains reliant on a vibrant economy that creates robust tourism demand. The current focus on the islands by Southwest and other competitors risks limiting Hawaiian's ability to cash in during a period of strong demand.

A final word on airline stocks

Over time, airline stocks tend to move together, influenced by macroeconomic factors like the price of oil, the overall health of the economy, and travel demand that are largely outside an individual company's control. For that reason, there can be periods in which investors are better off ignoring the sector instead of investing new money in any carrier and periods coming out of a recession in which both top performers and second-tier players tend to outperform the market.

Investors interested in airlines should pay attention to where we are in the cycle and how that could impact the industry. Once you've determined the time is right to buy in, a number of factors can differentiate airlines and determine which are the best buys.

The U.S. industry is much healthier now than it has been in years past, and there is much less bankruptcy risk than in previous decades. Airlines, for the first time in a generation, are suitable candidates for a buy-and-hold investor. Just understand there can be turbulence before boarding.

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Lou Whiteman owns shares of Berkshire Hathaway (B shares), Delta Air Lines, and Spirit Airlines. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Delta Air Lines, Southwest Airlines, and Spirit Airlines. The Motley Fool recommends Alaska Air Group, Hawaiian Holdings, and JetBlue Airways and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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