These 2 Ultra-Low-Cost Airlines Are Poised for Takeoff

With air travel making a comeback from the pandemic's blow to the industry, airline stocks are also due for a recovery. Folks are getting back out there for both leisure and business travel, and the global low-cost airlines market is expected to hit more than $300 billion over the next five years -- suggesting an impressive annual growth rate of nearly 10%.

Ultra-low-cost carriers -- also known as budget airlines -- provide affordable travel with limited amenities compared to the major airlines. Read on to learn more about two ultra-low-cost airline stocks -- and which is better poised for a steep ascent.

Allegiant Travel: Demand remains strong

Based in Las Vegas, Nevada, Allegiant Travel (ALGT -0.33%) carries its passengers to and from mid-size cities across the country as well as world-class vacation destinations. The company boasts "base airfares less than half the cost of the average domestic round-trip ticket."

With Florida as one of Allegiant's key markets, Hurricane Ian caused the cancellation of most flights touching the state. As a result, late last month the company announced an expected reduction in its annual revenue guidance by approximately 1.5%. Allegiant has since contributed to the disaster relief effort to assist communities devastated by the storm.

Despite weather-related headwinds, Allegiant's most recent traffic report for August showed signs of improvement. Senior Vice President Drew Wells commented that while the peak summer-travel season is over, "the demand environment has remained strong." Allegiant saw a nearly 2% increase in load factor -- a metric used to measure seating capacity -- marking a significant improvement over August of 2019. 

Claiming "astronomical" demand levels, Allegiant posted an all-time high Q2 revenue record of $629.8 million this year -- a whopping 28% increase over Q2 2019. The company is also branching out into the resort business, with plans to open its first Florida vacation property, Sunseeker Resort Charlotte Harbor, in May of 2023. So far, Allegiant has booked more than 1,100 room-nights at Sunseeker.

Spirit Airlines: Delivering a record summer

Spirit Airlines (SAVEQ -6.10%) touts itself as the leading provider of customizable travel options, allowing travelers to pay only for add-ons they need. The company calls it "À La Smarte" -- fares start with just a seat, and from there guests can add options such as bags, seat assignments, and refreshments. With a commitment to "deliver the best value in the sky," Spirit Airlines offers flights to destinations across the U.S. and Caribbean.

The Miramar, Florida-based airline performed exceptionally well this summer, particularly July, when the company came in third of all U.S. airlines in completion factor -- or scheduled flights that actually flew -- setting a new company record. In fact, 25 out of 31 days in July were at a 100% completion factor. However, in late September Spirit canceled 24% of its flights due to Hurricane Ian, which will impact the company's overall Q3 performance.

Spirit operates one of the newest and most fuel-efficient fleets in the U.S., with an anticipated 24 brand-new planes this year and another 33 next year. Continually expanding its footprint, the airline recently launched new stations at airports in New Mexico, Idaho, Nevada, and Virginia.

And now, Spirit is looking to set a new course. After a nearly six-month bidding war between JetBlue and Frontier Group Holdings, Spirit finally accepted JetBlue's offer in late July. JetBlue plans to acquire Spirit for a fully diluted equity value of $3.8 billion.

Upon completion of the merger, the combined entity would form the fifth-largest airline in the U.S. -- potentially disrupting the industry. However, the deal is not expected to close until the first half of 2024.

Which of these carriers is a better buy?

Since Spirit Airlines currently operates at a loss, a good way to gauge which is the better buy is comparing price-to-sales ratios.

Data source: E-Trade

Spirit's slightly lower price-to-sales ratio makes it the better buy currently. However, both of these ultra-low-cost airline stocks are due for some upside recovery as we put the pandemic chapter behind us. For investors seeking exposure now to the airline industry as it revives, now is a time to consider these shares.