2 Airline Stocks You Really Should Own in 2014
BALTIMORE (Stockpickr) -- "If you want to become a millionaire, start off as a billionaire and buy an airline." So goes the conventional wisdom of airline investing.
And for years, that advice has been dead on the money; airline stocks have done a good job of enriching bankruptcy attorneys and few others. In fact, it's difficult to even look at historical airline stock performance in the last decade or two simply because so many have gone out of business. So yes, the conventional wisdom says you'd have to be nuts to own airline stocks.
But as I'm about to show you, the conventional wisdom is wrong this time.
Why Investors Hate Airlines
Airlines are one of the go-to examples when people talk about cyclical industries. Cyclical doesn't mean straight down, though. Instead, it means that after every painful long-term correction, there's some exuberance to be had. And right now, we're entering "buy mode."
So why do investors hate airlines in the first place?
To be sure, there are some big headwinds in the airline business. First, it's capital-intense. New jets cost a fortune, so there are some big fixed costs that need to get vaulted before an airline can book its first penny of profit. Ongoing maintenance isn't cheap either. The safety record for U.S. air carriers is stellar for good reason: The FAA requires airlines to maintain their planes, pilots and crew to a high standard.
Variable costs aren't much better. Far and away, the biggest variable cost for air carriers is fuel. And with the upward trajectory of crude prices for the last few decades, it's no wonder that airlines have struggled to stay profitable. But fuel costs aren't a one-way street.
Instead, airlines have three big weapons they can use against the climbing cost of crude: hedging, fuel efficiency and rate hikes. While hedging has lost favor with many carriers (because it's hard to do right and easy to do wrong), more efficient aircraft and rising airfares have been working hard to boost margins at airlines.