And apparently, I’m not the only one.

U.S. airlines carry 612 million passengers annually. That’s a statistic that should come as little surprise to anyone who’s recently had the pleasure of waiting in an airport security line, but it’s also one that does a good job of illustrating just how essential air travel is for Americans.

Despite the necessity of commercial airlines, skyrocketing fuel prices have been shaking up the industry over the past year. According to the International Air Transport Association, jet fuel averages $3.41 per gallon right now — that’s 70% more than what it cost this time last year.

In the last few months in particular, big names like Aloha, Frontier and ATA Airlines have filed for Chapter 11, with no end in sight.

Potential Highfliers?

But that doesn’t mean that the $107 billion U.S. airline industry isn’t without its shining stars. When American investors think airline stocks, the usual suspects come to mind — United, Delta, American, Southwest and the like. But what about the regionals?

If you’ve ever flown in a smaller turboprop or regional jet like those used by Delta Connection or United Express, I’ve got news for you: Delta and United don’t actually operate those flights…the regionals do!

Regional airlines are smaller airlines that generally operate shorter-haul flights under license from the big boys. So that last red-eye you took might have said “Delta Connection,” but the planes, flight crews and support staff belonged to a regional like Comair or Mesa.

And unlike bigger carriers, many regionals are actually making money!

A Regional Worth Looking At

At the recent Taglich Brothers Small-Cap Equity Conference in New York, Jim Nelson and Greg Guenthner — two of my colleagues here at the Penny Sleuth — saw Dave Hackett, the CEO of Gulfstream International Group (GIA:AMEX), deliver an interesting presentation to potential investors.

Gulfstream is a regional airline that flies to 21 destinations in Florida and the Bahamas. The company is undergoing new initiatives to cut operating costs and expand beyond its region — two things that could prove very profitable for the company and its investors.

Historically, Gulfstream has been a profitable airline, but it’s been through a rough patch lately. Net loss for 2007 was just over $3 million. If the company can successfully steer its way back to profitability, expect to see some substantial share price movement.

Besides expansion and cost cutting, the airline has been pursuing a couple of revenue streams not available to the likes of United and American. One of those is Essential Air Service (EAS) contracts.

Because of low passenger volume, not all air routes can be flown profitably. That means that people in some rural areas are forced to drive for hours to catch the nearest flight, even if there is an airport just a few minutes away. As a result, the Department of Transportation subsidizes these Essential Air Service flights to ensure commercial air service to more than 140 communities.

These routes are very profitable for regional airlines, because they, essentially, guarantee the revenue of filled seats, even if there are only a handful of people aboard.

Last year, Gulfstream was awarded four EAS contracts, and it’s working on more.

Gulfstream’s Employees Pay It!

The other unique thing about Gulfstream is the fact that it doesn’t pay its pilots…its pilots pay it!

As wacky as that sounds, it’s true — while the company does pay its captains, Gulfstream actually receives payment from its first officers (the guys in the right seat). The company operates an airline pilot academy that offers green commercial pilots the opportunity to get some real experience in an airline cockpit.

In other words, Gulfstream rakes in almost $30,000 to fill a job that every other airline pays people to do.

While this sounds a bit scary, it’s not. Passengers are safe. The captains are highly qualified instructors, and the first officers are put through rigorous testing before they ever see a cockpit. In fact, every movement is so intensely scrutinized, it’s probably even safer than your average flight!

Keep Your Eyes on This One

This is definitely a stock that you’ll have to keep your eye on. With fuel prices expected to get worse before they get better, 2008 could be another trying year for the airline industry. If Gulfstream can turn things around, though, expect this company to really take off.

Cheers,

Jonas Elmerraji
May 13, 2008

P.S.: While I personally didn’t attend the conference, Greg and Jim did. In fact, they came back with tons of opportunities that they want to share with their readers. Unfortunately, many of these opportunities are too small for Penny Sleuth.

The Regional Airline So Good That Pilots Pay to Work There was originally featured in the Penny Sleuth.