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Navigating the Skies: Investing in the Airline Industry

Text caption "Investing in the airline" and airplane image and image of the "Wealthor" logo


The airline business is super interesting and really important for today's world. There are two main types of airlines: the budget-friendly ones and the fancy ones that offer you free meals and other perks. Before the COVID-19 pandemic hit, the number of people flying was growing a lot. In 2019, 4.6 billion people flew on airplanes. But then, the pandemic caused a huge loss for airlines, even worse than what happened after 9/11 and the 2008 financial crisis together: airlines around the world made an estimated $118 billion loss in 2020 .

But as the chart below shows, the airline industry overall was previously enjoying healthy profitability. In fact, the past decade was the most profitable in its history.

graph presenting: Net profit of Commercial airline worldwide from 2006 to 2021

While several airlines have gone bankrupt as a result of the pandemic, some airlines have managed to survive and are now in a good position to grow again with government aid in their pockets and less competition around. The S&P 500 Airlines Industry Index, however, has yet to resume its pre-2020 altitude.

So assuming airlines can return to their previous profitability, now might be a great time to get on board with a few of their stocks. In this blog post we aim to provide necessary information & analytical tools you’ll need to find the very best opportunities out there.

How to Analyze Airline Companies

When it comes to understanding the profitability of an airline, there are several key factors to consider. First, you need to look at the airline's capacity, which is the number of flights it operates per year. Second, you need to see how much of that capacity is actually being used, meaning how many seats are filled on those flights. Lastly, you have to consider how much money the airline makes per passenger and how that compares to the cost of operating its flights.

Key Metrics to Consider

  1. Available Seat Miles (ASM): This is a measure of an airline's capacity. It's calculated by multiplying the number of seats available on a flight by the number of miles that flight travels. For example, Delta Air Lines had an ASM of 275 billion in 2019.

  2. Revenue Passenger Miles (RPM): This metric helps you understand the volume of passengers an airline is carrying. It's calculated by multiplying the number of paying passengers by the distance they travel. Delta had 238 billion RPM in 2019.

  3. Load Factor: This is the percentage of available seating capacity that's being used by passengers. For Delta in 2019, the load factor was 87%, meaning on average, 87% of the seats were filled.

  4. Passenger Yield: This helps you assess how much revenue an airline is generating per passenger per mile. It's calculated by dividing total passenger revenue by RPM. Delta's passenger yield was $0.176 in 2019.

  5. Cost Per Available Seat Mile (CASM): This metric gives you an idea of the airline's operating costs. It's calculated by dividing total operating costs by ASM. Delta's CASM was $0.145 in 2019.

What to Look for in Airline Stocks

When you're investing in airline stocks, you want to see capacity growth, high load factors, and increasing passenger yields. You should also look at how well an airline is managing its costs, as indicated by the CASM.

What comprises an airline’s operating costs? The three main things are labor, maintenance, and fuel. All three are variable costs in the sense that an airline’s total spending on them is largely determined by the number of flights it operates in any given year. But fuel costs are also heavily influenced by oil prices: largely beyond an airline’s control, outside of its fuel hedging policy. For that reason, you’ll sometimes see airlines report an additional CASM figure excluding the cost of fuel and allowing investors to better isolate and directly compare operating costs across companies.

How to Pick Airline Stocks

When it comes to choosing airline stocks, you don't have to be an expert in calculations. Most of the metrics you need are readily available in financial statements and investor presentations. The key is to compare these numbers over time and among different companies. Websites like the MIT Airline Data Project offer a wealth of data for all major U.S. airlines.

What to Look For

  1. Capacity Growth: One of the first things to look at is the growth in Available Seat Miles (ASM). This tells you if the airline is expanding its operations. However, more seats don't mean much if they're empty. That's where the Load Factor comes in. A high Load Factor means the airline is efficiently using its capacity.

  2. Passenger Yield: This metric shows how much an airline is earning per mile for each passenger. A steady increase in this number is a good sign. However, this can be affected by competition, especially among budget airlines. Strong brand reputation and customer loyalty programs can help maintain or increase passenger yield.

  3. Cost Management: Finally, you'll want to look at Cost Per Available Seat Mile (CASM). A declining CASM indicates that the airline is becoming more cost-efficient. However, make sure to compare this with airlines that offer similar services to get a fair idea.

Practical Example

For instance, in 2019, Delta Air Lines outperformed its competitors American Airlines and United Airlines in stock price. Delta had the highest ASM growth, the highest Load Factor, and the highest Passenger Yield. Although its CASM was not the lowest, it was decreasing compared to the previous year. This made Delta a more attractive investment option.

graph of stock performance of Delta airline vs United airlines and American Airline in 2019

graph of evaluation Delta airlines, united airline and American airline key metrics such as ASM and CASM, passenger yields ...etc

Valuation Metrics

After you've looked at operational metrics, you'll want to consider the stock's valuation. The most commonly used valuation multiple for airline stocks is EV/EBITDA. This takes into account both the company's value and its earnings before certain deductions. Websites like Atom Finance and Koyfin offer this data for free.

By keeping these factors in mind, you can make a more informed decision when picking airline stocks.

Conclusion: Your Guide to Investing in Airlines

Alright, folks, it's time to wrap up our journey through the airline industry. You're now equipped with the tools and insights to analyze airline companies like a seasoned investor. So, what's next? Take your newfound knowledge and apply it to find that soaring stock in the recovering airline industry.



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