If you want a multiple, use EV/EBITDAR over the P/E  because of how it normalises the different lease structures that airlines use when they want to lease a plane (which is what most do). It makes airline versus airline comparisons easier.  Airlines are very, very cyclical because the economy is cyclical and appetite for flying follows the economy. A modest 4-8 EV/EBITDAR suggests that we’re at a peak in the cycle, compared to the average benchmark of 10-15. Investors in that case are not willing to pay for what’s next in a future investment, which would be a trough for airlines, and probably a recession. This is the weakest time for industrials and airlines.

When said trough comes and everyone’s freaking out over “losses” in the stock market, put the magnifying glass back over Southwest and other airlines you like. You’ll probably see some brave souls starting to pay higher multiples again, so give it a while and investors will start paying a premium for whatever earnings again in droves. That’s because of what they believe is coming next in the cycle, an  economic recovery! This is typically the strongest time for industrials and airlines , which is why you see investors rotating in during the early recovery stages and driving multiples higher. See my railroads primer for a complete strategy as to how to invest with this cycle effectively. The same strategy applies to the railroads.

Now go and enjoy a well earned pint, and get amongst those airline stocks if you dare!

Chris Morrissey

Chris started in financial advisory, assembling client portfolios with pension companies and investment banks. Following that, he worked at an agricultural commodities trader in London and now various "fintech" start-ups. He's also studying business full-time at Lancaster University. Feel bewildered by the stock market? Chris will help you get things under control.

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