Airline stocks have been on fire of late, with shares of the big four U.S. airlines stocks — Delta Air Lines (ticker: DAL), Southwest Airlines ( LUV), United Continental Holdings ( UAL) and American Airlines Group ( AAL) — up between 36 and 82 percent in the past year.
According to Boeing Co. ( BA) CEO Dennis Muilenburg, the aviation boom may have just started to take off.
Muilenburg says airline traffic growth will be good news for Boeing and other commercial airline producers. However, it could also be a good sign for the airlines themselves. “While the global economy is tending to be a bit flat, I would argue that the aerospace market is in a growth position,” he says.
Boeing estimates air traffic growth is up 8 percent this year and predicts total global air traffic will grow at an average annual rate of 4.7 percent for the next two decades. The total global fleet of commercial aircraft will expand from 23,480 today to 46,950 in the same period, Boeing estimates.
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Delta, Southwest, American and United account for more than 70 percent of total U.S. domestic flights. In recent years, airlines have focused on becoming more efficient with their operations. The results speak for themselves, as the airlines have reported record profits in the past two years.
Airlines have even impressed one famous industry critic so much that he has invested billions of dollars in each of the major U.S. airlines stocks. Over the past year, Berkshire Hathaway ( BRK.A, BRK.B) CEO Warren Buffett has accumulated $2 billion stakes in Delta, American, United and Southwest. As recently as 2013, Buffett called airlines a “death trap” for investors.
At Berkshire’s 2017 annual shareholder meeting in May, Buffett said that the airline business remains a “fiercely competitive industry” but that the top companies “at present are earning quite high returns on invested capital.”
Last year, JP Morgan analyst Jamie Baker predicted that airline margins would contract to just 10.5 percent during the next economic downturn, higher than their peak levels during previous economic booms.
“An industry that is capable of earning in a downturn what used to be reserved for the peak unquestionably warrants a re-rating,” Baker wrote in 2016.
[See: 9 Investing Steps From Warren Buffett’s Playbook.]
Airline stocks certainly seem to have plenty of upside if the companies can convince skeptical investors of the durability of their current earnings power. Shares of American, Delta and United are all currently trading at low forward price-earnings ratios in the high single digits.
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Air Travel Boom Could Provide Tailwind for Investors originally appeared on usnews.com
