Better Buy: Allegiant Travel or JetBlue Airways Stock?

With demand for flights skyrocketing, airline stocks have the potential to recover from their pandemic-induced slumps. While the operating environment remains challenging, well-positioned airlines stand to benefit from the current wave of demand -- as do their investors. 

Here, let's compare two recovering airline stocks to determine which makes the better buy in today's market.

The case for Allegiant Travel

Allegiant Travel (ALGT -0.33%) generated its highest annual revenue ever last year, surpassing its previous pre-pandemic record by a remarkable 25%. Despite challenges, Allegiant's performance improved as 2022 progressed. 

Fourth-quarter operating revenue landed 23% higher than the same period in 2021, totaling $612 million. Allegiant CFO Robert Neal attributed the revenue gains to "the sustained strong demand environment" combined with better fuel prices and operational efficiencies. 

Perhaps more notably, last quarter's $612 million marked a 33% increase above 2019's Q4 revenue. And Q4 total revenue per available seat mile (TRASM) hit its highest quarterly level ever, 20% above 2019's Q4 TRASM. Completion factor, or the percentage of completed flights, gained 2% in the second half of 2022 and finished the year at 99.5%.

In all, Allegiant delivered a record $2.3 billion in annual revenue last year -- 25% higher than its previous record from pre-pandemic 2019. Demand remains sky-high for Allegiant's low fares and nonstop flights.

Amid record revenues, Allegiant contended with soaring expenses last year. Heightened fuel and crew costs, along with lost revenue and customer compensation expenses, imposed a $100 million financial hit in the first half of 2022. Interestingly enough, however, the second half of 2022 only resulted in a $30 million financial hit.

The Nevada-based ultra-low-cost-carrier ended Q4 with a net income of $52.5 million -- only 13% shy of 2019's Q4 net income. However, for the full year, Allegiant only netted $2.5 million -- 99% below 2019's net income of $232 million.

Now looking to carry forward the momentum from 2022's second half, Allegiant anticipates 1% year-over-year growth in first-quarter 2023. Amid "a robust demand environment that shows no signs of slowing," according to CEO John Redmond, Allegiant anticipates setting new revenue records in 2023.

While revenues are expected to be strong this year, profitability remains an issue for Allegiant, with its gross margin roughly half of what it was in 2016. Not only that, cash flow from operations has dipped below 2015 levels, although capital spending is now 2 times higher. Interested investors should keep a close eye on Allegiant's ability to convert future revenues into more significant profits for the company.

The case for JetBlue Airways

After returning to profitability in the second half of 2022, JetBlue Airways (JBLU -0.26%) achieved the best Q4 operating revenue in company history. Not only that, the New York City-based airline posted its highest annual revenue ever in 2022.

Q4 revenue of $2.4 billion marked JetBlue's record result for the period, driven by a strong completion factor of 98.2%. JetBlue also added new flights in New York City, Boston, and between the American Northeast and London, U.K. last quarter, while also announcing upcoming service to Paris.

While JetBlue Airways finished Q4 with a net income of $24 million, and closed Q3 with a net income of $57 million, for the full year it ended with a net loss of $362 million.

With plans to compete directly with the "Big Four" airlines (Delta Air Lines, American Airlines, United Airlines, and Southwest Airlines), JetBlue initiated the acquisition of Spirit Airlines last year. Expected to close by the first half of 2024, the deal would position JetBlue as a "low-fare challenger to the Big Four airlines," according to CEO Robin Hayes.

However, the U.S. Department of Justice (DOJ) has recently thrown a wrench in the gears of the deal, suing JetBlue in an antitrust lawsuit. DOJ lawyers claim that the merger would reduce competition among U.S. airlines, while Hayes believes it would only improve competition.

As with other airlines, JetBlue acquired substantial debt during the pandemic shutdown and stay-at-home period. On top of that, in order to grow the company and compete with larger airlines, JetBlue will have to take on even more debt. Some might argue that JetBlue is attempting too much, too soon. Time will tell whether the merger closes as expected, but investors should be aware of JetBlue's looming debt snowball.

Acquisition aside, JetBlue became profitable again last year, and Hayes expects JetBlue to generate its "first full year of profit since the pandemic" in 2023. Despite higher rents and landing fees at airports, as well as elevated labor and fuel costs, Hayes predicts JetBlue will approach pre-pandemic margin levels toward the end of this year.

Which airline stock is a better buy?

To determine which stock presents a better buying opportunity right now, I've compared their price-to-sales ratios (P/S), price-to-book ratios (P/B), and financial debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios.

Table data: Ycharts.

Although JetBlue Airways has a better (lower) P/S ratio and P/B ratio, it also has a significantly larger financial debt to EBITDA ratio. Used as an indicator to determine how many years into the future it would take for a company to pay off its debts, the debt to EBTIDA ratio helps investors gauge how able a company is to pay off its debts -- based on its net debt and EBITDA remaining constant. 

Considering it would take JetBlue nearly twice as long to cover its debts than Allegiant, and also that JetBlue has a potential merger on horizon that would accrue even more debt, I think Allegiant makes the better buy as of today. 

Investors should keep a close eye on Allegiant's gross margin, ensuring that figure grows steadily over time. After all, record-high revenues don't mean much unless a company can convert those into record profits.