Airline Stocks Continue to Rally, But One High-Flyer Is Ready For A Pullback

Todays top stocks to buyWestJet Airlines executives have issued a warning on its short-term outlook, which could cause the stock to decline in the coming months…

No one can argue what a banner year airline stocks have had in 2013, and there’s still one month to go.

The industry is absolutely on fire.

Just take a look at the chart below showing the performance of the Dow Jones US Airlines Index (DJUSAR) over the past year.

The recent upward trajectory of airlines has been attributed to increased margins due to more efficient planes and higher airfares.

But looking at this chart, you would’ve never guessed that this industry was on the verge of collapse just a decade ago.

Todays top stocks to buy

Through a series of consolidations and bankruptcies, the industry had to undergo a major overhaul – just to keep itself alive.

That’s when we saw the likes of Delta Air Lines snatch up Northwest Airlines, United Airlines and Continental Airlines merge into one company, and Southwest Airlines acquire AirTran.

With renewed focus and commitment to profitability, airlines have been soaring ever since.

With another proposed merger between American Airlines and US Airways being hammered out as we speak, a major transaction of this magnitude could provide yet another boost for the industry.

Of course, it’s not just domestic airlines that have had amazing success in recent months.  Airline stocks in Canada have risen sharply this year as well – owing much of their resurgence to benefit by association with US stocks.

However with all of this momentum, investors can’t help but wonder if this is sustainable.

Broadly speaking, the airline industry still has plenty of legs, for reasons mentioned above.  So in general, it’s relatively safe to stay bullish on airline stocks for now.

But as you know, not all companies are created equal and in this frothy environment, investors should really take the time to weed out the weaker hands to in order to avoid potentially costly mistakes.

One company to avoid for at least the next three months is the Canadian company WestJet Airlines Ltd. (TSX:WJA).

Last week, Canada’s second-largest airline saw its stock rise to an all-time high of $28.47 amid a solid third quarter earnings report that surpassed analyst estimates.

But despite beating projections, the Company cautioned investors about pricing pressure moving forward as it continued its aggressive growth plan.

Though WestJet brought in a net income of $65 million in Q3, profits were still down 8% from the previous year’s quarter.

In fact, revenue per passenger fell 5 percent in Q2 and dropped a further 4 percent in Q3 and is expected to be flat in Q4.

This is due to the Company ramping up two major offerings: a tiered-seating price scheme for economy class and the rollout of its regional airline, Encore.

Budget passengers are still warming up to the idea of having to pay extra for more legroom and other perks in economy, so WestJet declined to comment on its revenue guidance for 2014 other than it expects to achieve its goal of $49 to $77 million in revenue from these bundled packages sometime in the new year (whenever that is).

Also, in launching of its Encore airline to serve smaller regional destinations, the Company is hoping to compete more directly with Air Canada’s (TSX:AC.B) own low-cost carrier, Rouge.

Eight Encore planes are expected to be up in the sky by 2014.  Another 12 planes are already on order, and the company has the option to buy 25 more.

With a fresh injection of seating capacity into the market, analysts are concerned that this could put a drag on prices…especially if the new planes don’t get filled.

So while these sweeping changes to WestJet’s offerings have long-term prospects for the Company — there will likely be some growing pains before we see the strong airline that the management team envisions.

If you’re eyeing this stock to gain exposure into the red-hot airlines sector, look to buy in after WestJet rounds the bottom corner.

Yours in profits,
Todays top stocks to buy
John Holt
for Top Stock Millionaire
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