United Flying Friendly Skies
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: JetBlue reported 2nd quarter revenue of $1.2 billion, not earnings.
If the conventional wisdom in the investing world is to stay away from airline stocks, then that goes double for legacy carriers like United (NYSE: UAL).
The reason analysts warn investors not to take a ride on airline stocks is because the finances of the companies tend to resemble the flight paths of the Blue Angels, loop-de-looping all over the place.
The market is also highly competitive. Ever since deregulation in 1978, airlines have been racing to the bottom in order to keep up the bottom line. It doesn't help that the airline business is a capital intensive one. First, the airlines have to buy the planes, then fuel them up. They also have to hire pilots, flight attendants, people to vacuum them, load luggage, stock the planes with meals that used to be free, and maintain them (we hope).
The history of commercial aviation is littered with the names of airlines who just couldn't keep up with the requirements; such as Braniff, Pan Am, and Eastern.
But the airlines that have managed to keep flying must be doing something more than getting by on a wing and a prayer.
United has good fundamentals that allow it to keep flying the friendly skies. The venerable carrier posted a second quarter profit of $339 million. Its earnings also grew by around 59 percent in 2011. United also has a healthy free cash flow which is surprising given how much capital the industry requires. On the other hand, its quick ratio is only .70, but major airlines tend to carry a lot of debt, so United's not unusual in that regard.
For a company that got hit hard by 2008 financial crisis and high fuel costs the whole industry suffered under, the results are rather impressive.
The merger with Continental, however, appears to have hit the company with a bit of turbulence, but with United's financials relatively healthy, it looks like it'll get over this bump.
Mergers have become the way the industry sustains itself in the still interesting times we're living in. Delta (NYSE: DAL) merged with Northwest and the bankrupt American Airlines is trolling for buyers. U.S. Airways has openly expressed interest, but JetBlue (NASDAQ: JBLU) has rebuffed American, its CEO Dave Barger publicly denying that it will merge with the struggling carrier. With its second quarter revenue of $1.2 billion last quarter, JetBlue's doing just fine, thank you. U.S. Airways, however, is still negotiating with American, making deals with their unions.
United's merger with Continental will give it access to more destinations. Even though the combined airline maintains the United name, its logo, its website design, the seat pattern and even the CEO, Jeffrey A. Smisek, all come from Continental.
United's actions should give investors some reasons to be optimistic. First, it's taking delivery of the new Boeing (NYSE: BA) 787 Dreamliner. The new plane, which is intended to replace the popular 767 on medium-long haul routes, is more fuel-efficient than previous models, which will help avoid some of the major fuel problems that the industry suffered under a few years ago. Another addition to United's fleet, the Boeing 737 Max, will also give United added fuel economy when the planes join the fleet. The company had already begun dumping some of its older gas-guzzlers from the fleet even before the Continental merger.
Continental had also shown commitment to biofuels, which should also make fueling its planes cheaper and easier in the future. United is also part of the Sustainable Aviation Fuel Users Group.
If investors have been staying on the ground for the best few years, it may be time for them to start flying United's friendly financial skies once again.
ddelony has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.