Which airline stock should you own?

Think your money is safest with the big players? You may want to reconsider.

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With airlines recently forming partnerships and agreements throughout Australia, it could be hard to know which airline stocks are right for your portfolio.

At first glance the bigger companies like Qantas Airways (ASX: QAN) and Virgin Australia (ASX: VAH) appear to be expensive and debt-laden, two things I always try to avoid in my portfolio. This can be normal for some stocks and particularly with airline stocks as they are usually volatile and can carry risks not associated with other companies. But if the past month has shown us anything, it’s that these two heavy weights are willing to battle it out for your money.

Last month a Qantas-Emirates alliance was formed and yesterday the ACCC gave Virgin and Tiger Airways Australia the all clear for a similar agreement. Investors can take ease in the fact that management from both camps are continuing to search for new opportunities.

However it is coming at a cost. Qantas and Virgin Australia both have growing amounts of debt, with their debt to equity ratios currently at 111.3% and 180.1% respectively. It is not surprising when the tools of their trade can cost many millions of dollars, but this is an unnecessary risk that I’m not willing to take.

Air New Zealand’s (ASX: AIZ) current prospects look more appealing to this investor — currently the shares are sitting near 52-week highs but only have a P/E ratio of 10.13. In the half-year ended 31 December, revenue was up 3.6% to $2.388 billion and NPAT was $100 million, up from $38 million the year before.

In addition, its March operating statistics revealed solid results throughout its Pacific/Tasman routes and although capacity decreased in Asia following the withdrawal of Hong Kong-London services, the group-wide yields were up 2.7% year on year. With many good things in the pipeline such as upgrades to their existing Boeing 777-200 fleet in 2014, a codeshare agreement with Virgin from Christchurch to Perth and more seats for domestic passengers, there’s much to like about this airline. However, if that wasn’t enough, the group has also won the highest Randstand employment award for New Zealand three years in a row — something never done by any company in the world — and  a 7.3% dividend might be enough to impress many investors.

Foolish takeaway

Look away from the heavyweight Australian airlines — they’re too expensive and are trying to fly with a debt anchor heavier than them. Smaller companies like Air Zealand and Rex Express Holdings (ASX: REX) have consistently given back to shareholders while the others struggle to make a keep. You might think your money is safer in bigger airlines but when the debt and losses catches up to them they might come crashing to the ground.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz does not own shares in any of the mentioned companies.

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