3 Airline Carriers to Consider

Louie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As we know, the $192 billion U.S. airline industry market is highly competitive. And this high competition puts a strong pressure on margins, making it impossible for companies to increase prices unilaterally. It is a situation that forces everyone involved to put a strong focus on costs, making a thorough analysis of its structure to squeeze every possible penny.

For the past few years, the industry faced a series of big acquisitions and mergers. I will go through three companies that have shown changes in this matter lately and give my opinion on their future outlook.

Challenges in investments

Southwest Air (NYSE: LUV) only operates within U.S. territory, reducing exposure to other routes. However, if we compare Southwest and the rest of the industry, the indicators are not very favorable for the company. Southwest’s P/E ratio has reached 14.0 while the industry average is locked in at 11.8. Furthermore, its EV/EBITDA is 6.0 and if we compare it with the whole sector, we find it at 6.8. This reveals that the company is showing a higher share price than its peers.

In spite of this, the company started a mid-term investment plan, which includes the acquisition of AirTran Holdings in May 2011. Since then, Southwest began integrating operations and started an expansion process towards foreign markets to be finished in 2015. This expansion will augment the company’s exposure, but also increase income.

In order to cope with high competition, Southwest is investing in optimizing and renovating its fleet. Apart from the upgrade of 89 Boeing 737-700s of its fleet, the company has also acquired 9 new Boeing 737-800s and 2 used Boeing 737-700s.

These initiatives are driving better results for the company. EPS growth in the first quarter has shown a rise from -$0.02 to $0.07 and is expected to keep having a positive trend throughout the rest of the year.

Results of the merge

Delta Airlines (NYSE: DAL) is the second largest American airline and operates in regional and international markets. After having completed its merging process with Northwest Airlines in December 2012, the company announced its plans to buy a 49% stake of Virgin Atlantic, which would position Delta Airlines in big markets such as the London-New York route and the pacific northwest circuit as it is projected.

Service delivery has been improving for Delta, driving earnings up. The company’s EPS beat predictions of $0.06 per share and reached $0.10. In addition, the company is reducing its debt, which went from $14.5 billion to $13.8 billion at the end of fiscal 2010, and to $11.7 billion by the end of 2012. This has helped Delta obtain lower interest rates and generate savings of $30 million. If the company remains in this good track, we should expect even better results.

On April 2012, Delta bought Phillips 66’s Trainer refinery and converted its existing infrastructure to maximize jet fuel production. Plus, the carrier has agreements to exchange all non-fuel production for crude oil and jet fuel. This initiative will secure higher protection against oil price volatility.

Impressive turnaround

US Airways (NYSE: LCC) announced on February 13th its merger with American Airlines, one of the biggest airlines in U.S. This mega-announcement is backed by the company’s good results throughout the last two years, which surpassed its own historical averages and the rest of the industry’s.

Currently, US Airways enjoys a very high ROE of 84.7% with a 5-year average of 60.7% while the industry average is at 11%. The company has performed remarkably well in 2012 with a 6% growth in sales and a net margin of 5% versus an industry average of 3%. Its earnings saw an outstanding increase of 310%, reaching $2.79 per share in the last quarter of 2012, and $3.16 in the first quarter of 2013.

US Airways’ performance is encouraging, especially considering how competitive this industry is. The carrier’s plans to retire older 737s and incorporate Airbus A321s will improve its bottom line reducing maintenance costs.

Bottom line

In the case of Southwest, it will be important to monitor its integration process and the performance of its new routes. These will define the company’s future in the mid-term.

Overall, Delta is promising. Its well-managed merger with Northwest increased network scale, providing revenue and cost synergies. So, it would not be surprising to see revenues climb about 4% this year.  

The most impressive performance clearly belongs to U.S. Airways, which has proven to turn mediocre figures into an example within this highly competitive market. I am very optimistic about its merger with American Airlines, if it proves to be successful, the company will become a global leader. But we still have to wait for regulatory approval and integration challenges.

Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. 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!

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