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Forget United, Buy These 3 Airline Stocks Instead

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Investor sentiment finally caught up to shares of United Continental UAL after video emerged online that showed a passenger being dragged off a Chicago-Louisville flight. Shares are down about 4% in Tuesday morning trading, and the legacy carrier’s market cap has fallen by more than $750 million so far to $21.8 billion.

United said four crew members needed to get to a flight departing from Louisville otherwise it would be canceled, and passengers were asked to voluntarily give up their seats. However, when no one volunteered, four passengers were then selected at random, including the man who was forcibly removed.

The Chicago Department of Aviation said in a statement that the incident "was not in accordance with our standard operating procedure and the actions of the aviation security officer are obviously not condoned by the department."

United’s CEO Oscar Munoz has stood by his decision to remove the man who refused to give up his seat on the overbooked flight, describing the passenger as “disruptive and belligerent.”

Not United’s First PR Mess

Just last month, United found themselves in another public relations disaster when the airline barred two teenage girls from boarding a flight after a gate agent decided the leggings they were wearing were inappropriate. The incident was first reported by a fellow passenger on Twitter (TWTR - Free Report) , and subsequently went viral.

But the girls were apparently “pass travelers,” a company benefit that allows United employees and their dependents to travel for free on a standby basis; leggings violated this specific dress code, since pass travelers are “representing” the airline.

Industry Outlook

Looking beyond United, the airline industry as a whole is looking hot right now. The International Air Transport Association (IATA) expects the global airline industry to bring in $30 billion in profits this year, with 4 billion projected travelers. The earnings represent a 4.1% net profit margin on top of total revenue of $736 billion.

Historically, airline stocks were—and they still are—a turbulent investment, closely tied to fluctuating oil prices. But during periods of low oil prices and steady economic growth, like the type of environment we’re in now, airlines see their profits rise. Since 2014, U.S. airline stocks as a group have gained almost 90%.

Even Berkshire Hathaway BRK.A CEO Warren Buffet, who publicly denounced airline investments in the past, sees promise in the industry. Last year, the famous investor bought stakes in all four major U.S. carriers: United, American Airlines AAL, Delta DAL, and Southwest LUV.

The Transportation-Airline industry sits in the top 42% of all 265 industries ranked by the Zacks Industry Rank. While it’s only gained 4.77% so far this year, the industry has pulled in solid returns over the last 1, 3, and 5 years compared to the S&P 500. Given this overall bullish sentiment, let’s take a look at three airline stocks investors should consider.

SkyWest SKYW operates one of the larger regional airlines in the U.S., and provides passenger and air freight services. While the carrier sits at a #3 (Hold) on the Zacks Rank, it boasts a VGM score of ‘A.’ SkyWest expects year-over-year earnings growth of 11.6% for the current year, and has an average earnings surprise of over 34%. The airline has also beaten expectation in the past four consecutive quarters. In the past one year, SKYW has given a solid return of over 68%.

Gol Linhas Aereas GOL provides regular and non-regular flight transportation services for passengers, cargo, and mailbags in Brazil and internationally. The carrier is a #1 (Strong Buy) on the Zacks Rank, and has a VGM score of ‘B.’ Shares of GOL have gained over 125% year-to-date, and over 365% in the past 12 months.

While Gol Linhas expects a year-over-year earnings decline of about 89% for the current quarter, the company has seen one positive estimate revision for the same time frame. Gol Linhas also has an average earnings surprise of over 52%, and posted earnings beats in three of the past four quarters.

Alaska Air ALK provides passenger air, freight, and mail services within the state of Alaska and on the West Coast. The carrier is a #3 (Hold) on the Zacks Rank, and has a VGM score of ‘B.’ Alaska Air became one of the first U.S. airlines last year to return to unit revenue growth, with revenue per available seat mile (RASM) up 1.5% year-over-year.

For the current year, Alaska expects year-over-year earnings growth of 8.77% on top of year-over-year sales growth of 37.07% for the same period. The carrier has beaten expectations in the past four consecutive quarters, with an average earnings surprise of 5.5%.

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