Airline Stocks Off the Beaten Path: 3 Key Picks for Investors

Key Points

• Despite challenges for the airline industry, some smaller or less-known names offer attractive value and strong growth potential.
• Latin American carriers Copa and Volaris have carefully managed capacity and load factors through different operational scenarios.
• Aerial wildfire maintenance firm Bridger stands to benefit from longer fire seasons and greater demand.

Some of the major players in the airline industry have faced a slew of negative headlines in recent months. Delta Air Lines Inc. NYSE: DAL suffered a tire explosion that killed two workers in August. Boeing Co. NYSE: BA was in the news multiple times for safety issues with its aircraft and, in mid-September, saw 30,000 machinists go on strike. A global software outage in July forced airlines around the world to cancel or delay thousands of flights, a move that Delta said cost it about $500 million.

This negative attention may make it seem that there is little upside for investors considering leaning into the airline industry. However, travel demand remains strong, particularly in Asia, and U.S. travel volumes now regularly top pre-pandemic levels. Airline fuel costs, typically significant for these firms, are down relative to recent months, alongside a broader relaxation in oil prices. And airlines often have a strong second half of the year thanks to several high-demand travel periods.

Some lesser-known or under-the-radar airline companies within this framework offer particularly compelling prospects.

CPA: Uptick in Traffic and Capacity

Panama-based Copa NYSE: CPA is an emerging leader in the fast-growing Latin American airline space. Copa's revenue passenger miles (RPMs), a measure of its total passenger traffic, increased by a healthy 5.8% year-over-year for the month of August 2024, while its year-to-date traffic growth is even higher at 8.5%.

An important metric for airline companies is the load factor. Expressed as a percentage, the load factor reflects the portion of airplane seating capacity utilized in flight. Since the costs of flying a plane are relatively the same regardless of how many people are on board, a higher load factor—and, thus, a fuller plane—typically means the airline is spending more efficiently.

Copa's load factor for August was 85.1%, down 1.9% from the same time a year earlier. For a fuller picture, though, investors should keep in mind that Copa's capacity is 9.1% year-to-date, which may have contributed to the decline in load factor. All told, between increases in customer traffic and additional capacity for more passengers, Copa is poised to benefit from overall industry growth in Latin America.

VLRS: Buying Opportunity While Planes Grounded

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. NYSE: VLRS, commonly known as Volaris, is an ultra-low-cost airline serving Mexico, the U.S., and South America. Investors taking a longer view of the airline industry may find an opportunity to buy Volaris on the dip, as the stock is down almost 28% year-over-year.

Contributing to Volaris' share decline has been a reduction in capacity and RPMS. The firm reported available seat miles (ASM) capacity dropped by more than 15% year-over-year for the month of August 2024, for instance, while Mexican RPMs were down by 22% over the same period.

The reason for the drop in these metrics is an extended engine inspection program which has grounded almost a third of Volaris' fleet since late last year. The fact that the company was still able to log a load factor of 87% for August indicates that it has effectively balanced this project against customer demand.

Analysts predict an average price target of $12.52 for VLRS shares, almost double the current price. Investors should watch for signs of improvement as the company completes its engine program and gets its full fleet back up and running.

BAER: Growing Fire Season Needs

Bridger Aerospace Group Holdings Inc. NASDAQ: BAER provides investors an airline opportunity outside of the traditional industry. Bridger is an aerial wildfire management company that uses a fleet of aircraft to fight fires throughout the U.S.

Bridger's operations are linked to wildfire season, which has steadily grown in length and reached National Wildland Fire Preparedness Level 5 on July 18, a level not achieved since 2021. The growth in fire season has driven a rise in exclusive-use task orders for Bridger's aircraft and expansions of deployment periods.

To accommodate greater demand and to further grow its customer base and seasonality, Bridger recently completed the acquisition of FMS Aerospace, an aircraft engineering and modification company. Following this update, analysts view Bridger as a buy with upside potential of almost 96%.

Lesser-Known Airline Companies' Value

Many lesser-known airline firms offer attractive value metrics. Both Copa and Volaris, for example, have P/E ratios under 7, considerably lower than several larger players in the airline industry. Searching beyond the biggest names can help investors maximize potential in this space.