Best Airline Stock for 2011 (DAL, UAL, AMR, LUV, AAI, LCC, JBLU, ALK)

The year just passed has been a good one for US air carriers. For the first time in several years, virtually every carrier earned a profit and airline stocks posted gains ranging from a few percent to more than 100%.

The generally good year could be partially attributed to an improving US economy that encouraged more people to travel by air. Another part of the increase was due to the increased revenue from each passenger, due mostly to new fees and charges for services that the airlines once offered at no charge. And while some passengers may complain about the nickel-and-dime approach, the fees for checked bags and snacks kept the headline price of tickets low, attracting more passengers who are now being trained to expect less and like it.

Major US airlines like Delta Air Lines Inc. (NYSE: DAL) and United Continental Holdings (NYSE: UAL) both posted solid gains in 2010. AMR Corp. (NYSE: AMR), parent of American Airlines, continued to struggle, finally turning a profit in its September quarter. Regional carrier Southwest Airlines Co. (NYSE: LUV), which expects to complete its $1.4 billion acquisition of AirTran Holdings, Inc. (NYSE: AAI) in the second quarter of 2011, posted a share price gain of almost 20% for the year. Other regional airlines, US Airways Group, Inc. (NYSE: LCC), JetBlue Airways Corp. (NASDAQ: JBLU), and Alaska Air Group, Inc. (NYSE: ALK), saw even better share price gains.

Here’s a short table showing the tickers, the current price, the mean target price from Thomson Reuters, the implied upside to that target, and the 52-week trading range. We’ll have some comments on these companies following the chart.

Delta shares gained nearly 20% in 2010, gaining back more than half the share price loss over the past five years. Delta’s P/E ratio for the trailing twelve months is 19.41, while its forward P/E is just 5.62. Analysts appear to think that Delta’s best year is behind it.

United shares gained more than 80% in 2010 as the company completed its acquisition of Continental. United’s trailing P/E ratio is 13.07, and its forward P/E is just 4.86. Like Delta, United may have had a very good year, but 2011 could be problematic.

AMR shares finished the year about where they started. The string of quarterly losses yields no meaningful P/E ratio, though the forward P/E is set at 20.76. The stock’s price target is barely above it’s 52-week high, but there’s still a lot of space between the current price and the target price. Growth could be very slow.

Southwest shares gained about 20% in 2010, but the acquisition of AirTran gives the airline a position in Atlanta, which it has lacked until now. The stock’s trailing P/E ratio is 22.03, and its forward P/E is 14.57, the best of any of the airlines covered here.

US Airways shares more than doubled in 2010, to lead the industry. The stock’s trailing P/E is 4.74 and its forward P/E is just 3.86. Based on its performance in 2010, that appears to be a rather gloomy outlook. But US Airways’ performance was based on two quarters where it lost money, just not as much as expected.

JetBlue shares gained about 20% in 2010, but profits have been small. The stock’s trailing P/E ratio is 21.26, and the forward P/E is 11.86. A lukewarm outlook if ever there was one.

Alaska Air shares gained a bit more than 60% in 2010. Earnings beat estimates in three of the last four quarters, but there’s not a lot of growth in the forecast for next year. Trailing P/E is 10.06, and forward P/E is 8.15. Again, not exactly nosebleed territory.

For 2011, the best airline stock should be Southwest. The acquisition of AirTran is a huge plus for the company. But the airlines business is fickle, and just one good year in the last several is no particular reason for investors to see a bandwagon where none exists. Fuel costs, competitive pricing, and a slow-growing economy are potent forces for airlines to have to deal with.

Paul Ausick