Let’s try putting all this into practice. The biggest three US airlines are American Airlines, Delta Air Lines, and United Airlines. The graph below shows their stock price performances in 2019. You can see that Delta performed best, up 17% over the course of the year while United rose 5% – and American’s shares fell 11%.

2019 stock price performance of the biggest three US airlines (Source: Koyfin)

To analyze the reasons for this divergent price performance, let’s now take a look at the airlines’ 2019 performance on the metrics we’ve been considering above, as collated in the table below.

The biggest three US airlines compared using industry-specific metrics

Delta Air Lines – the top-performing stock among the three – had plenty going for it in 2019. For starters, it had the highest capacity increase, with ASM increasing 5.3%. And that didn’t come at the expense of empty planes: Delta also had the highest load factor, indicating it was the best at efficiently utilizing its capacity. Delta had the highest passenger yield too, meaning it generated the most revenue per passenger per mile. While the company’s CASM wasn’t the lowest of the bunch, at least Delta managed to reduce it compared to 2018 – unlike American Airlines. That yawning CASM was likely one reason why American’s stock price fell in 2019.

The key takeaway from this example is that airlines performing well on the metrics you’ve learned about should, in theory, see strong stock price performances too. Which brings us to our last question: after you’ve analyzed an airline company, how can you assess the stock’s valuation?

Comparing valuation multiples between peers is one popular approach: an airline company with better operational metrics than its rivals but a lower multiple means you just might be onto something. The most common valuation multiple applied to airline stocks is EV/EBITDA. Enterprise value (EV) is the value of a company’s outstanding shares plus its “net debt” – total debt minus cash holdings. It’s essentially what someone would have to pay to buy the entire company. EBITDA, on the other hand, means “earnings before interest, taxes, and depreciation and amortization”. This essentially calculates a company’s operating profit prior to factoring in the impacts of various financing and accounting decisions.

You can find airline stocks’ EV/EBITDA multiples for free via data sources such as Atom Finance and Koyfin. Where possible, it’s better to look at the multiple that uses “NTM” – or next twelve months – EBITDA, as this uses analysts’ average forecasts for future operating profit rather than backward-looking numbers.

Conclusion

You’ve now got a pretty good grounding in how to analyze airline companies like a pro and what to look out for when selecting specific airline stocks. Now get out there and put what you’ve just learned into practice – you might just find your next high-flying stock emerges, phoenix-like, from a resurgent airline industry.

What you've learned about investing in airlines:

🔹 The airline industry consists of two distinct categories: low-cost and full-service carriers.

🔹 Available seat miles (ASM) measures an airline's capacity. A growing ASM indicates that the airline is making either more or longer flights, or both.

🔹 Load factor tells you what percentage of an airline's available seating capacity is being filled with passengers: the higher, the better.

🔹 Passenger yield gives you an indication of the average fare per passenger per mile. It’s a promising sign if an airline can steadily increase this over time without losing customers.

🔹 Cost per available seat mile (CASM) tells us how well an airline is managing its costs. A low or decreasing CASM compared to rivals indicates that the airline is or is becoming more cost-efficient.

🔹 The most common valuation multiple applied to value airline stocks is EV/EBITDA. If you find an airline with better operational metrics than its peers but a lower valuation multiple, then you just might be onto something.