Are Mergers the Only Way to Fly the Unprofitable Skies?
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The terms "successful business" and "commercial airlines" stand diametrically opposed. Bankruptcy courts have been in an oversold status for the major carriers over the last 15 years as all except high-flying Southwest (NYSE: LUV) needed to recheck their financial baggage. With so many failures in this industry, the wave of mergers appears to be the only way to manage the turbulence of the unprofitable skies.
The ability to make money has proven nearly illusive for most airline companies. Union labor costs, fleet maintenance, and increased prices of jet fuel impact every carrier regardless if they are of the "legacy" or "low-cost" variety. The steady rise in the oil market so far in 2012 has prompted Delta Airlines (NYSE: DAL) to enter discussions with ConocoPhillips to take over one of its East Coast refineries in an effort to hedge its balance sheet risk against further increases in fuel cost.
All variables being equal, why have there been so many snakes on the planes preventing the airlines from finding favorable tailwinds to profitability? Perhaps the legacy carrier model of hub-and spoke travel with multiple plane types will experience a renewed level of efficiency through more consolidation. Maybe the low-cost airlines have changed the landscape and their method of point-to-point short haul routes with like-bodied planes is superior. The problem is neither method has found smooth air when it comes to steady earnings for shareholders in a business with fragile profit margins.
| EPS | Profit Margin | |
| United (NYSE: UAL) | 2.26 | 2.27% |
| Delta (NYSE: DAL) | 1.01 | 2.43% |
| US Airways (NYSE: LCC) | 0.44 | 0.54% |
| Southwest (NYSE: LUV) | 0.23 | 1.14% |
As witnessed through the numbers, the two of the last three recent mergers in the industry -- with Delta taking over Northwest in 2008 and United joining with Continental in 2010 -- have seen both ventures improving earnings per share and overall profit margin. The jury is still out on whether Southwest will see similar results in its purchase of fellow low-cost carrier AirTran. Rumors have abound in recent weeks that US Airways may look to approach bankrupt American Airlines for a potential partnership.
The landscape of air travel is rapidly changing and not all of the developments will be completely to the consumers' liking. More mergers may produce greater efficiencies in capacity and service, but travelers will likely see increases in ticket prices in return. Airlines have proven they can survive by passing along larger amounts of their cost to the paying public, be it significant penalties for changing reservations or the dreaded checked baggage fees. Despite the seething agitation higher charges have evoked, travelers have continued to ante up. The FAA reports the domestic carriers saw a 3.5% increase in total activity in 2011.
With these trends and figures in mind, the 30,000 foot view of this maligned industry appears more favorable than at any point in the post-9/11 era. However, for those who dare to soar with these stocks, take care to know where the exit doors are in case you need to bail out early.
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