Regional Airlines Have Better Balance Sheet at the End of 3Q16


Dec. 12 2016, Updated 8:05 a.m. ET

Airline comparisons

The airline industry is a capital-intensive industry with heavy investments required in building infrastructure, fleets, and maintenance. As a result, airlines generally have high debt on their balance sheets.

Legacy players have very high debt, while regional players seem to have managed their debts well. As you can see in the above graph, at the end of 3Q16, American Airlines (AAL) had the highest net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio or leverage of 7.3x. It was followed by United Continental (UAL) at 3.1x. Delta Air Lines (DAL) had a leverage of 1.9x.

Article continues below advertisement

Regional player JetBlue Airways (JBLU) has a leverage of 0.52x, and Southwest Airlines (LUV) has a leverage of 0.03x. Spirit Airlines (SAVE) and Alaska Air Group (ALK) are the most efficient in terms of leverage. Both have cash in excess of debt. At the end of 3Q16, SAVE had a net debt-to-EBITDA ratio of -0.15x, and Alaska Air’s ratio was -0.55x.

Why pay attention to leverage?

Leverage tends to make a stock volatile and thus increases investor risk. Airline industry fundamentals have improved significantly, and margins are expected to have reached their peak. If margins fall as analysts estimate, it would mean reduced cash flows, making it difficult to make interest payments and leaving little if nothing on the table for investors. In fact, all three legacy players have already declared bankruptcy once as a result of high and unmanageable debt.

On the other hand, if airlines manage to maintain a balance between debt and cash, they would be in a much better position than their peers that have significant debt.

You can gain exposure to travel stocks by investing in the iShares Transportation Average ETF (IYT), which invests 22.0% of its portfolio in airlines.


More From Market Realist

  • SemiLEDS logo over LED lighting
    Company & Industry Overviews
    There's Still Time to Get in on SemiLEDS (LEDS) Stock
  • Trader on the NYSE
    Company & Industry Overviews
    What Are the Most Expensive Stocks Ever?
  • Michelob Ultra beer
    Company & Industry Overviews
    AB InBev Is the Top Beer Brand Worldwide—Is It a Monopoly?
  • Businesswoman looking out a window
    Company & Industry Overviews
    Shifting Focus: Three Women Investing Funds in 2021
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.