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Forget Qantas Airways Limited – there’s a better longer-term airline stock to own

The airline stock that is hogging the limelight is Qantas Airways Limited (QAN) but there’s another that’s been better at capitalizing on the industry’s volatility.

Regional Express Holdings Ltd (REX) looks poised to consolidate its hold on regional air services with the Australian Financial Review reporting that the $113 million market cap company will take over routes flown by rival Skytrans following the latter’s decision to shut down operations after a quarter of a century in business.

It has been a tumultuous time for regional carriers with Brindabella Airlines and Vincent Aviation falling into receivership over the past year.

This means Regional Express is flying into 2015 with two potential tailwinds – increasing market share and falling operating costs.

The small cap airline had been cautiously optimistic in its comments to shareholders at its annual general meeting in November. This is understandable given the violent ups and downs suffered by the sector.

But the scrapping of the carbon tax by the sitting federal government is tipped to add $2.5 million to current financial year’s profit (based on 2013-14 company accounts). That alone is worth 23.4% of last year’s pre-tax profit.

What’s more, the collapse in the fuel price will also provide a material uplift to earnings given that Regional Express spent $37.8 million in fuel, which represents 16.5% of total costs. Not all of the fuel savings will flow to its bottom line because of the fall in the Australian dollar (and because of hedging contracts), but the airline should still benefit from cheaper aviation fuel should the commodity remain around these levels.

Airlines

One would think Qantas is the best airline stock to own given its more than doubling in value over the past year compared with a “paltry” 12% rise in Regional Express’ value. But the relative share price performances really reflect how much trouble Qantas was in before.

Regional Express is a better managed airline and has always managed to post a profit in the past few years when its larger rival was drowning in red ink. The stock is trading 0.5% higher at $1.035 this morning.

The regional carrier didn’t give guidance for 2014-15 except to say “FY15’s profit will be better than FY14’s”. That may turn out to be one of the bigger understatements for this year.

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Motley Fool contributor Brendon Lau owns shares in Regional Express Holdings.

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