Last year The Lexington Group invested in a number of American air carriers, which paid off as the sector has significantly outperformed the S&P 500, they expect the trend to continue and for the share prices to keep rising.
In December of 2012 The Lexington Group initiated positions in a number of American air carriers including; Delta (DAL) , Spirit (SAVE), Alaska Air (ALK), United Continental (UAL), and in a riskier move pink sheet shares of American Airlines (AAMRQ). Across their investments in the sector The Lexington Group has seen profits of 70%. A smaller position was taken in American Airlines after the company filed for bankruptcy and was de-listed from the NYSE and re-listed on the over the counter market, the pink sheet shares are up 330% this year.
Analysts at The Lexington Group have identified various reasons for the upswing in prices. There has been a series of mergers that have made the airlines more efficient and profitable. The merges have given the remaining airlines the ability to cut capacity and finish their price wars. While this is not great for consumers, it will drive profits and boost the share prices. Analysts at The Lexington Group believe that the industry has become less risky as the air carriers have shifted their attention from gaining market share to managing and increasing profitably.
The Lexington Group analysts think that the airlines are still a good value, considering that every airline has outperformed the overall market. They believe that traffic trends will continue to grow. They also believe that if the government allows the US Air, American Airlines merger, it would boost the entire sector as it would reduce capacity further, and prevent the end for airlines to cut fares that hurt profit margins.
The analysts are recommending the sector to clients, but note that while the industry is less risky than it was, there is still a medium degree of risk with the airline industry.