US Airways, American to Merge: So What for Airline Stocks?

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So the long planned merger between US Airways (NYSE: LCC) and AMR, the parent of bankrupt American Airlines, is finally going through. The two announced that the boards of both firms approved the $11 billion deal … finally. The firms have given themselves less than nine months to complete the combining of the two companies.

The big question about the merger is, “so what?” Is it going to change the fortunes of the airline industry? I doubt it. I've heard talking heads say the merger is part of an important process of consolidating the industry. That's fine, but I doubt it's enough to make a real impact without limiting the amount of flights the two produce. And if that happens the company will end up retrenching for a while.

The real issue is that the big carriers are getting beat up by smaller, low-fare airlines. With only three major U.S. carriers left after the merger, there will be limited competition from the big boys. But even a big moose can be brought down by a pack of small dogs nipping at it all day long. I think that's the future of the airline industry for the next 10-15 years: fewer and fewer trips as the Internet replaces the need for face-to-face meetings and what trips there are being more on the smaller, cheaper carriers.

US Airways

Yes, American will still exist after the merger. That's great, but the winner here is US Airways. LCC's chief executive Doug Parker is taking control of the combined company when the merger is complete. Hell, it's not the firm that's in bankruptcy, even if it was sort of voluntary. Still, I think that US Airways is a bit inflated right now with all the merger talk. It's up more than 40% in the last year but a P/E of 4.65 gives a sign that there's not a lot of buyers out there betting on it long-term. That or the merger mania is already factored in. Take a wait-and-see approach, but I don't think it'll be a buy for quite a while.

United Continental Holdings (NYSE: UAL)

Another one of the big flyers and another one I can't, in good conscience, recommend to you people. UAL has a long and proud history. Even with the firm seeing growth in traffic year-over-year, it doesn't seem to make sense to bet on a large carrier in these troubled times for the industry. The company is at -2.32 on its EPS and its stock has still grown over the last six months from 18.17 to 26.19. How's that for confusing? Like US Airways, UAL has a big 'avoid' written all over it to me.

JetBlue (NASDAQ: JBLU)

The first of those discounted carriers I mentioned, JetBlue is doing crazy things like reporting a profit. It reported $376 million in profit for 2012. In 2011 that number was $322 million. While there might be some fourth quarter weakness in 2012's numbers, that's still a good number for any airlines.

Small, regional and intra-U.S. flights are what the firm specializes in (only 15% of its flights go outside the borders). The stock was basically flat over the last 12 months but that hides a drop to $4.15 last May and a recovery to $5.98 now. Some analysts have doubts about the company's ability to continue performing but it might be worth a bit of risky money.

Southwest Airlines (NYSE: LUV)

Ah, the darling of the skies. Everyone loves to praise Southwest. Beyond that, some traders and analysts like to praise the firm, or at least bet on it. There are things here to like. Southwest is a growing firm that's now trying to build on its low-cost reputation to leverage a bit more money out of its customer base by offering optional upgrades. If they don't get carried away on those things should go well.

The firm is trading well, growing 47% since last April (though it had dropped before then) and a P/E of 21.23 indicates that there's some buying optimism out there right now. If you're into owning an airline this is one you should definitely have in your portfolio.

Alaska Air Group (NYSE: ALK)

Don't be thrown off by the name. ALK does own Alaska Airlines but it also owns Horizon Air and does a pretty good job of it. Some analysts are very hot on it these days. The company defines itself as a smaller, agile firm and is showing the growth to justify the brag. The firm's net profit margin almost doubled from 2011 to 2012, going from 3.89% to 6.79%, and I believe in it. Since early June the stock has climbed from $32.36 to $49.52 and I'm thinking there's still some value in there to be had.

Owning airline stock isn't for the faint-hearted and hasn't been for more than 30 years. The after-effects of deregulation are STILL being felt in the industry and may continue to be felt for another 10 years or more. But what is clear, at least to me, is that smaller is better when you invest in this industry. Sure, keep an eye on the big boys, but set your default to 'NO' for a long while, yet.

Good luck!

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