Airline Stocks: Surprising Performance, But Can It Last?

Published on Monday, 09 April 2012 00:11 Written by Todd Shriber

It might surprise some to learn that in a year in which oil prices have remained high by historical standards and concerns about the veracity of the global economic recovery have persisted, that the Guggenheim Airline ETF (NYSE: FAA) is up a solid 11.4% year-to-date.

Maybe the real surprise is just how sharply some individual airline stocks have performed this year. For example, Delta (NYSE: DAL), the largest U.S. carrier, has surged over 28% since the start of the year. Shares of United Continental (NYSE: UAL), the second-largest U.S. carrier, are up more than 13% and  those solid returns for Delta and United have com as one of their primary rivals, American, is dealing with bankruptcy protection.

Speaking of American, the real juggernaut of the airline group this year has been the company that is most often rumored to be interested in acquiring the downtrodden Texas-based carrier: US Airways (NYSE: LCC). The stock is up a jaw-dropping 53.4% on the year. What’s even more impressive about that run for US Airways is that the stock trades for less than $10, meaning many fund managers are barred from purchasing it. A 53.4% rise without vigorous institutional buying is almost unheard of.

The result of the company’s designs on American remain to be seen, but Arizona-based US Air has said a combined US Air/American could result in $1.5 billion per year in added revenue and cost savings. However, US Air has not held formal talks with American’s creditors, according to a recent report in the Wall Street Journal.

Still, there are opportunities with lesser-known airlines and the example of Spirit Airlines (NASDAQ: SAVE) highlights as much. Spirit is operating in the ultra-competitive discount carrier space, a realm dominated by Southwest (NYSE: LUV). In terms of share price performance, there isn’t much competition as Southwest, arguably the original low-cost carrier, has lost almost 3% this year compared to a 34.3% increase for Spirit.

Spirit is bringing new meaning to the phrase "discount airline." As Citigroup recently noted, offers a one-way ticket between Chicago and Minneapolis for under $30. That’s less than a bus ticket, and $100 less than what Delta would charge for the same ticket.

Citi noted Spirit’s "ability to enter new markets, offer fares that are lower than fares of both existing airline competitors, and (in some cases) land transportation options, and generate high returns." The bank has a $30 price target on the stock, implying upside of almost 50% from current levels. Spirit also recently expanded its service from Dallas-Fort Worth to Detroit, Mexico and San Diego. In an industry not known for its growth stocks, Spirit certainly stands out.