What You Should Know About the Newly Consolidated Airline Industry
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Although the U.S. Airways / American Airlines merger is still awaiting some regulatory agency approval, the shareholder consent of US Airways is a sign that the deal could be completed as planned during the current September quarter. If so, it will mark a significant event in the history of the airline sector, particularly the international carriers.
Whereas five years ago there had been numerous carriers that fly internationally, each operating out of five hubs or so, now, without counting, the three global U.S. airlines have eight to ten hubs. This means they will have the capability to accommodate more passengers than ever, and, from an investor standpoint, benefit from additional revenue and cost synergies.
Let's take a look at which would be the remaining companies and how they are performing.
American potentially resurfacing with efficiency
Current US Airways Group (NYSE: LCC) shareholders will own 28% of the new American Airlines.
While American had been forced into bankruptcy due to labor costs that were well above that of its peers, it has slimmed down and will likely gain further cost benefits from the pending combination. US Airways' management believes the new entity will realize more than $1 billion in cost synergies on an annual basis through network consolidation and the combining of activities.
At this juncture, US Airways departs from three hubs in the U.S., while also focusing on Washington's Reagan National. It is experiencing rising passenger traffic, as well as increased seat occupancy on flights, factors that support airfare hikes. It is probably gaining market share on the domestic front, adding seating capacity, while the legacy giants aim for heightened productivity by keeping this metric flat.
Early indications are that the proposed American Airlines would be similar in nature, continuing to build its presence in the U.S. and competing with the low-cost rivals like JetBlue and Southwest. This is why out of the big three (American, United Continental, Delta), shares of American might be an investment in expansion, at least while the two are in the process of integrating.
Productivity gains and fare increases
United Continental (NYSE: UAL) is cutting capacity on underperforming routes, even as the revenue environment improves. At the same time, it is up against cost inflation. The overall result, given stable fuel prices, should be a solid profit gain in 2013.
Notably, part of the company's strategy to control expenses this year has been to renew its aircraft fleet with more fuel-efficient models. This is along the same trajectory as Delta after its merger with Northwest, when it pared down its fleet size. In fact, asset efficiency has become a key aspect of the major airlines' business structures.
United is a favorable investment for those seeking a carrier targeting profit improvements, along with one that serves growing Pacific-based international markets. I like the stock as a buy and hold selection while it completes the final phases of its profitability-boosting integration.
A merger that worked
Delta Air Lines (NYSE: DAL) is reaping the benefits of its 2008 purchase of Northwest. It has stayed profitable more consistently, and is now continuing to expand its route network further. Its agreement to form a strategic alliance with Virgin Atlantic, which should provide it with an enhanced presence at London Heathrow, is evidence of this move.
Meantime, Delta is on pace for a solid profit gain this year behind increased traffic (revenue passenger miles), pricing (revenues-per-available-seat-mile), and occupancy (load factors). That said, it too is sustaining a profitable level of capacity, actually reducing seating year over year.
What Delta would see benefits from is a recovery in the European economy, as about 20% of its annual revenue is derived from Atlantic routes. Regardless, like United Continental it is likely to realize heightened productivity as an advantage for long-term profit growth, given conducive external conditions (GDP and fuel costs). For this reason, it is a good long-term buy.
Once, and if, the US Airways / American merger is completed, the airline industry should be marked by further benefits of consolidation, including size and scope. The three major carriers with international presences would now comprise a leading group of companies in an industry poised to grow. It should be noted that Southwest Airlines is planning to expand abroad and, given its combination with AirTran, might well be on pace to becoming a fourth major that's also positioned to compete with the smaller growth carriers.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!