Sky Talk

After a slow beginning, airline stocks soar at year’s end

mfaulkner@star-telegram.com

What a difference six months can make.

At the halfway point of 2016, most airline stocks were down by almost a third. Investors were worried about declining revenues after several terrorist attacks in Europe.

But as airlines reported solid second- and third-quarter earnings, stock prices began to stabilize.

Then Wall Street investors received two pieces of news that have caused airline stock prices to soar to record highs by the end of 2016.

First, billionaire Warren Buffett disclosed that his firm, Berkeshire Hathaway, had made significant investments in American Airlines, Delta Air Lines, United Airlines and Southwest Airlines.

For several years, Buffett had dismissed the airline industry as place for investors to put their money only if they wanted to lose it. His reversal and subsequent airline investments made during the third quarter were seen as an endorsement of the industry.

“This investment further reinforces our view that our industry has fundamentally changed in a profound and lasting way, and we know delivering long-term financial success will provide continued evidence of this fact,” American said in a statement about Buffett’s investment in the Fort Worth-based carrier. Berkshire Hathaway owned 21.7 million shares of American as of Sept. 30, currently worth over $1 billion.

Shares of American, which were trading as low as $30 a share this summer, ended the year at $46.69. The stock price has increased by 10.2 percent in the past year. Dallas-based Southwest Airlines’ stock has performed even better, closing at $49.84 on Friday, up 15.8 percent this year.

Investors have also been encouraged by airlines executives’ comments about higher demand for business and leisure travel in the fourth quarter.

“The airlines haven’t quite been able to put their finger on what is driving the improvement, but most cite pent up demand due to earlier anxiety around the US election,” Cowen and Co. analyst Helane Becker wrote in an investor report in December. “As could be expected, higher demand is resulting in improving yields and the stocks followed by moving to record highs.”

Low-cost Spirit Airlines has seen its shares improve the most, up 45 percent to close at $57.86 for the year. United Airlines, which has added several new executives in 2016 and plans to focus on its domestic network next year, has seen its shares increase 27.2 percent, closing at $72.88 on Friday.

Only Delta Air Lines and JetBlue Airways have seen their shares decline in 2016, both down by 1 to 3 percent, closing at $49.19 and $22.42 respectively.

As airlines are expected to report strong fourth-quarter earnings in January, investors are buying more airline stock.

J.P. Morgan analyst Jamie Baker said he saw a “meaningful surge” in inquiries about the airline industry from new investors in November as well as current clients wanting to add more airline stocks to their portfolio.

“To us, this signals two likely phenomena: first, that significant incremental analysis will translate into materially strengthened demand for equities, perhaps as early as January, and 2.) existing owners aren’t looking to lock in profits in fear of stretched valuations, as much as add to current positions,” Baker wrote in an investor note in December.

Andrea Ahles: 817-390-7631, @Sky_Talk

Company

Closing stock price on Dec. 30

Percent Change in 2016

Alaska Airlines

$88.73

10.21%

American Airlines

$46.69

10.25%

Delta Air Lines

$49.19

-2.94%

JetBlue Airways

$22.42

-1.02%

Spirit Airlines

$57.86

45.18%

Southwest Airlines

$49.84

15.75%

Virgin America*

$56.97

58.22%

United Airlines

$72.88

27.23%

*Virgin America was acquired by Alaska Airlines, and its stock stopped trading on Dec. 14.

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