The Airline Industry Is Likely to Fly Higher!

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

Rising consumer sentiment has fueled the airline industry by strengthening passenger traffic for most airlines. Delta Air Lines (NYSE: DAL) and US Airways (NYSE: LCC) offer an attractive investment prospectus and they are suited for growth-oriented portfolios. On the other hand, United Continental (NYSE: UAL) may not be a good investment at the moment for the reasons outlined below.

Here come the numbers! They are important!

Every month, airline carriers release a monthly traffic report. By delving through these statements, we may have a general idea about company performance. Also, the data will be reflected in second-quarter 2013 earnings statements.

Delta Air Lines saw its domestic revenue passenger miles (RPM) decline by 0.8% to 10.5 billion for the month of June on a year-over-year basis. However, RPMs for the international section increased by 2.8%, fueled by a 6% jump in Latin American flights. The international section is important because the flights offer the highest operational margins due to the implementation of newer and more fuel-efficient aircraft. Its overall RPMs increased by 0.7% to 18.3 billion.

The company has expanded its available seat miles (ASM) to capture as many passengers as possible. Its domestic ASM increased by 0.7% to 12 billion. Further, its international ASM increased by 2.2% to 8.9 billion. Its load factor resulted in a decline of 0.6% to 87.5%.

In brief, the company had steady passenger traffic, and it is meeting the demand by adding seats available for purchase.

Blowout performance

US Airways had blowout performance in June. Its domestic RPM increased by 7.4% to 4.4 billion. What’s more is that its Latin American RPM increased by 12% to 0.5 million. The total mainline RPM increased by 7.3% to 5.8 billion.

To meet the strong passenger traffic, the company is adding more seats available for purchase in the form of available seat miles (ASM). Its ASM for the domestic section increased by 4.9% to 4.9 billion. Its Latin American ASM increased by 13.4%. The robust passenger traffic increased the load factor by 1.7% to 88.2%.

Struggling airline

United Continental Holdings is struggling to capture the passenger traffic other carriers are enjoying. Its RPM in the domestic division declined 2.4% to 8.5 billion. On the other hand, the international RPM increased by 1.5% to 8.2 billion fueled by a 3.4% increase in its Latin American RPM. Overall, its consolidated RPM declined by 0.6% to 19.1 billion.

To keep its operational margins steady, the company has removed 2.0% of the available seat miles to end up at 21.7 billion. Its domestic ASM decreased by 4.1% to 9.5% and its international ASM remained unchanged at 9.3 billion.

As a result of lower ASM, its load factor increased 1.7% to 87.7%.

Enough of numbers!

Ok, ok. In brief, US Airways had outstanding passenger traffic in June. Delta Air Lines had a good month, and United Continental had poor performance. What worries me is that United Continental has been trending down.

What are the tailwinds for these carriers?

The airlines are trying to increase their presence in international markets. Overall, their Latin American flights have been more profitable due to higher loading factors.

Delta Air Lines has inaugurated a $1.4 billion Terminal 4 in the JFK International Airport in New York. This strategy will increase its presence internationally. Further, the company is renovating the Terminal 3 in the same airport. Its passenger traffic from JFK International Airport may increase considerably in the coming quarters.

Further, the company has formed a partnership with Gol Linhas Aereas to increase passenger traffic between the U.S. and Brazil. In addition, it is waiting for final approval from the U.S. Department of Transportation to inaugurate the route from Atlanta to Sao Paulo. This should be important since Sao Paulo, Brazil is economically the most important city in South America.

Overall, Delta Air Lines is expanding to major international markets with the opening of Terminal 4 in the JKF International Airport, and the new codeshare agreement with Gol Linhas Aereas may bring additional passengers to the airline.

US Airways is also expanding its international presence. Its shareholders have recently approved the merger with American Airlines. Also, the company has already elected the board of directors for the new American Airlines. With this merger, the company will have the largest presence internationally among U.S. carriers. The expansion may bring additional revenue.

The company is also expanding routes to Brazil. The airline was tentatively awarded permanent authority to operate the route Charlotte, N.C. to Sao Paulo, Brazil. 

In addition, the company is bringing $100 million from a trust certificate offering to finance newly acquired aircraft. Also, the carrier is expected to deliver seven Airbus Aircraft during the second half of 2013. In this fashion, it will increase its ASMs. Investors must remember that the ASMs are simply the capacity for the aircraft to bring revenue. Therefore, US Airways is expanding its revenue-generation ability.

Finally, United Continental is struggling to maintain operational margins by adding more efficient aircraft. The carrier has announced the conversion of 25 previously ordered Airbus A350-900 to A350-1000. Further, the company has added 10 more aircraft to the existing order totaling 35. They are scheduled to begin delivery as early as 2018.

These aircraft will replace older aircraft serving long-haul, high-demand markets. Therefore, the carrier’s operational margins should increase.

In addition, the carrier has increased its order for Boeing's B787-10s “Dreamliner” by 20 to 65. United Continental is the North American launch customer for the 787-10s, and it expects the delivery of its first aircraft in 2018. The airline will be able to modernize its international fleet by replacing older, less efficient aircraft.

Overall, the company’s operational margins should increase with the replacement of old aircraft by newer, more fuel-efficient airplanes. However, investors should look for higher passenger traffic before investing.

My two cents

Delta Air Lines and US Airways have been continuously expanding to international markets. Their June monthly traffic report shows stronger passenger traffic. Further, they are meeting the high demand by opening new international terminals, merging with other airlines, and opening new routes. Therefore, these stocks present an appealing investment prospectus, and they should be considered to gain exposure to the industry.

United Continental is improving its operational margins by replacing older aircraft with newer and more fuel-efficient airplanes in long-haul flights. It is important because long-haul flights have the best operating margin per seat. However, investors should look for improving passenger traffic before committing to this airline.

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Robinson Roacho 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!

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