This article will take a look at the best airline stocks to buy in the stock market. Airline stocks have vexed investors for many years because their earnings are very erratic, and they require a lot of money to run. They are also economically sensitive.

Nevertheless, airlines are essential to modern-day travel, both for business and leisure. Without airlines, there is no tourism industry, and there is no hospitality industry.

Air freight businesses are also critical to keep the economy and businesses running. Packages must be shipped all over the world.

The challenge in choosing the solid airline stocks is finding the ones that are in good shape financially. Airlines require a lot of debt and capital, and the reason so many airlines went bankrupt or had to merge with other airlines, is because they weren’t making enough money to pay their debts.

The good news for airline stocks is that, with fewer airlines now, there is less competition. That means airlines have more pricing power and can charge higher fees. The bad news is that consumers can get priced out of the air travel market, and that could lead to lower sales.

Our Top 3 Best Airline Stocks

If you’re in a hurry, below are our top picks for airline stocks as of this writing.

1. Southwest Airlines: Extraordinary track record of profit, cash flow, and low debt.
2. Alaska Air Group: Judicious expansion, efficiently run places it on solid ground.
3. Delta Airlines: Strong profit and cash flow are driving this stock higher.

Keep reading and learn more about each of these airline stocks and my thoughts on each.

What Are Airline Stocks?

Good airline stocks in the market come from three major segments.

The first is best known to consumers: the major brand-name airlines we have all been flying for years. If we want to travel a long distance, we buy our tickets and fly.

The same is true for business travelers. When the economy is good, businesses send employees and executives around the world to conduct business. I also put private jets in this category. They are quite profitable, but there are no major publicly-traded private jet airlines.

The second category of best airline stocks are freight, or cargo, airlines. These airlines ship items all over the world, usually packages, but sometimes larger bulk items or containers.

Interestingly, many of the same names consumers recognize as leisure airlines are also doing business in cargo. It only makes sense. If an airline is flying planes already to carry passengers, why not just remove the seats and fly cargo?

The leading cargo airline is Federal Express, having hauled 16.85 million tonnes of cargo in 2017. However, because it is not a pure-play airline company, we exclude it for this article.

The final category for airlines are aerospace companies. However, because companies like Boeing only manufacture the planes, and are not actual airlines, we are not covering those in this article, either.

Read Also: What’re the best dividend stocks?

How Do You Determine What Qualifies As The Best Airline Stocks?

The best airline stocks usually have these three characteristics:

1. Consistent, if not stable, net income
2. Consistent, if not stable, positive free cash flow
3. Manageable debt

Consistent, if not stable, net income

It may sound obvious that an airline should have consistent net income, but because of constantly shifting demand for air travel, and expenses such as fuel, an airline can still be in good shape and report a loss from time to time.

For example, if fuel prices are higher than normal due to a sudden spike in oil prices, and that coincides with reduced demand, revenue will fall short, and impact the bottom line.

We expect higher revenues, but also higher expenses, associated with the summer travel season. Kids are off school, parents take vacation, and the family flies somewhere for a trip. With higher demand, though, comes higher prices. So the second quarter for most airlines is a good one.

It’s when an airline reports repeating quarters of net losses that one should become concerned.

Consistent, if not stable, positive free cash flow

Cash flow is perhaps the most important metric on a company’s financial statement. Simply put, it tells us if the company is taking in more money than it pays off, after adjusting for non-cash accounting items, such as depreciation.

You can find the operating cash flow line on all cash flow statements. Right beneath that you will find “capital expenditures”. Subtract that number from operating cash flow and you have free cash flow – the amount of money left over for the airline to use after it also spends money to maintain or upgrade its fleet.

We want lots and lots of free cash flow. That means a company has flexibility on whether to spend the money, save it, pay a dividend, or reinvest it into the business on things like marketing.

Airlines must have solid free cash flow because airlines require a lot of money to constantly cycle though the business to keep it running.

Read Also: What are the best retail stocks?

Manageable debt

The final category that allows a company to be one of the best performing airline stocks is manageable debt. A company that owes a lot of money is paying a lot of interest, and that subtracts from net income and cash flow.

What does “manageable” mean? It is highly specific to each airline. A lot of debt is fine if it finances growth and the company can pay the interest comfortably.

An airline that is paying out half of its profit to interest, though, is in trouble.

Here’s a video that gives additional information on investing in the most valuable airline stocks.

Southwest Airlines

What is it?

Southwest Airlines lands in the top stop for the best airline stocks for numerous reasons.

Southwest has an extraordinary record of generating net income quarter after quarter. It rarely reports a loss. Even during the travel downturn following the 9/11 terror attacks, Southwest still managed to report a profit.

This chart alone shows Southwest’s profit over the past 12 years.

Its $1.14 billion of net income in 2014 has tripled to $3.49 billion in 2017, and $3.68 billion in the trailing twelve months. It also generates between $1 billion and $2 billion in free cash flow every year, giving it a solid foundation to continue building its business on.

Southwest rarely has long-term debt that exceeds its cash and short-term investments. That places it as the most financially stable of all leading airline stocks.

It even pays a dividend of 1.22.

Alaska Air Group

What is it?

Alaska Air Group was founded in 1932, and has slowly and diligently grown its market share. It’s one of the top airline stocks because of careful growth and diligent management of its finances.

Alaska was primarily a regional carrier for many years, focusing on the northwest and western part of the country. Then it began flying to Hawaii. More recently, it broke into longer range flights by acquiring Virgin America.

This careful approach has resulted in regular annual profits. Following the financial crisis in 2009, when travel picked up again, Alaska made operational changes and started juicing more and more profit from its operations.

This chart shows the profit margin over the past ten years, and is shows how well Alaska turned things around.

Alaska remains one of the best airline stocks because its $605 million of profit in 2014 just hit $787 million in the trailing twelve months, and was over a billion dollars in 2017.

Free cash flow fluctuates between $340 million and $700 million annually.

Finally, Alaska has been very careful with its debt, which only totals $2.27 billion.

Delta Air Lines

What is it?

Rounding out our list of winning airline stocks is Delta Air Lines. For many years, Delta was known as a fairly mediocre airline. In recent years, however, it has buffed up its image and become the 37^th-best ranked airline in the world, and #1 U.S. carrier.

Other than the financial crisis, Delta has maintained solid profit margins for many years, as this chart indicates.

Delta is one of the best airline stocks because it has enjoyed some of the highest profits in the entire industry. Its $659 million of profit in 2014 exploded to $4.5 billion the next year and is $3.5 billion over the trailing twelve months.

Free cash flow fluctuates between $1.3 billion and $5 billion annually.

Delta has higher debt than other airlines, at $6.2 billion, but it can easily afford to service that debt because of its net income.