Airline Scorecard: How Do These 6 Carriers Stack Up After Earnings?

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Investing in airline stocks is a challenge at the best of times — and this is far from the best of times. In this capital-intensive, high-cost, low-margin business, the difference between a solid investment and a potentially scary one is just as much about performance metrics and passenger perception as it is about numbers.

Most U.S. airlines’ latest quarterly earnings are much improved over last year, and many performance metrics are up too. The Bureau of Transportation Statistics recently said 86.2% of all flights arrived within 15 minutes of the scheduled arrival time in February — the highest on-time performance for the sector since BTS began keeping records in 1988. The rate of mishandled bags also set a record low of 2.6 bags per 1,000.

Despite those glowing numbers, airline passengers are growing increasingly dissatisfied with customer service. The recently released Airline Quality Rating report found that passengers were less likely to lose their luggage, arrive at their destination late or be bumped from a flight in 2011. But despite the performance improvements, 53% of frequent flyers say their air travel experience has gotten worse in the past year.

So which airline is doing the best job on all three fronts — financial, performance and customer perception? Let’s run the numbers. I’ve created a five-point scale for each of these categories; each airline will be ranked based on the total number of points, with a maximum score of 15. We’ll also discuss how attractive their stocks look.

Here’s how these six carriers stack up:

JetBlue

Financial: Higher fares and a traffic increase of 14% in the quarter delivered a $30 million profit (9 cents a share) on $1.2 billion in revenue for low-cost carrier JetBlue (NASDAQ:JBLU). It was a miss, however: Analysts had forecast EPS of 17 cents on nearly $1.3 billion. Higher fares offset fuel prices that were more than 20% higher than a year ago. [4 points]

Performance: JetBlue held on to third place in the AQR for the third consecutive year. [4.5]

Perception: 10% of frequent flyers chose JetBlue as their preferred carrier. [3.5]

Total: 12 points

Stock Notes: In the low-cost carrier space, JBLU is doing a lot of things right on revenue, capacity and customer service. When an airline raises its fares aggressively and grows its traffic at the same time, somebody is doing something right. For JBLU, that somebody is Chairman and CEO Dave Barger, who told CNBC he will grow the airline organically rather than seek out mergers or acquisitions. JBLU is expanding its operations into the Caribbean (which accounts for one-fourth of its current growth) as well as Latin America.

Trading just under $5, JBLU shares have fallen 23% since peaking in February near all-time highs around $6.20. The stock has a low price-to-earnings growth (PEG) ratio of 0.52, indicating that it is undervalued.

This is my favorite stock in this space now. It has found a very profitable niche in the Caribbean/Latin America region, it’s growing traffic, boosting customer service and it’s cheap. I think JBLU is a buy now, with a one-year target of $8.

Delta Air Lines

Delta Air Lines DALFinancial: Delta Air Lines (NYSE:DAL) surprised everyone by posting a $124 million Q1 profit (15 cents a share) on nearly $8.4 billion in revenue. Analysts had expected a loss of 4 cents a share (DAL lost $318 million in the same quarter last year). Fuel hedge gains and a slot swap at airports in New York and Washington, D.C., helped pump up the profits. Without the hedges, DAL would have lost a nickel a share. [4 points].

Performance: Delta moved up one point in the AQR from seventh place to sixth. [4]

Perception: 12% of frequent flyers chose DAL as their preferred airline. [3]

Total: 11 points

Stock Notes: DAL runs a close second to JBLU, but for very different reasons. As a mainline carrier, DAL is the beneficiary of the turbulence rocking peers American (PINK:AAMRQ) and United Continental (NYSE:UAL). Its business model is different than JBLU’s because it’s becoming more profitable by shrinking capacity.

DAL’s passenger complaints have fallen by 53% in the past year and the airline’s per-passenger revenue is up by 14% — that’s a boost in fees as well as fares. DAL also has increased capacity by 25% at its LaGuardia hub. One potentially huge negative: the notorious unreliability of fuel hedges, which sooner or later burn everyone.

Industry rumors say Delta could be poised to purchase a ConocoPhillips (NYSE:COP) refinery in Pennsylvania to have greater control over its fuel costs. Delta President Ed Bastian said his airline doesn’t comment on rumors. Delta still will have to run hard to outpace its rivals in the long run, but it’s the best mainline stock for now. Still, jet fuel prices are hovering around $3.20 a gallon — if they remain at that level all year, it will raise the airline industry’s fuel bill by an extra $41 billion.

DAL trades at nearly $11 — near a two-month high and 60% above its 52-week low under $7 in August — and has a ridiculously low PEG ratio of 0.27. The stock price is right; the fuel price isn’t. I’d hold off on DAL for now.

Southwest/AirTran

Southwest LUVFinancial: Fuel hedges, fare hikes and traffic growth from its AirTran subsidiary helped Southwest (NYSE:LUV) beat the Street by 3 cents per share in the first quarter. Excluding the hedges, LUV lost 2 cents per share on record revenues of nearly $4 billion. But fuel expenses rose more than 45%. [3 points]

Performance: AirTran nabbed the top spot in the AQR survey for the second year in a row. LUV’s rating fell to seventh from last year’s fifth. [2.5]

Perception: 17% of frequent flyers cited Southwest as their preferred airline; 3% cited AirTran. [5].

Total: 10.5 points

Stock Notes: Southwest/AirTran’s business model is changing — it’s no longer a low-cost carrier and it’s not yet a mainline carrier. LUV is contemplating international expansion and has just taken delivery of its first Boeing (NYSE:BA) 737-800, which will be certified for extended operations over water. LUV also is gaining from AirTran’s increased traffic — capacity grew by 27% in the quarter.

LUV shares have lost about 27% of their value during the past 52 weeks and trade at a PEG ratio of 0.5. However, I still think the integration challenges will catch up with LUV and it will have growing pains that will affect its rankings and performance. If you’re in LUV now, it shouldn’t hurt to hold, but I’d wait to initiate a new position.

US Airways

US Airways LCCFinancial: US Airways (NYSE:LCC) doesn’t hedge fuel, but a one-time gain turned what would have been a $22 million loss into a $48 million (28 cents per share) profit. That’s a big improvement over the $110 million loss for the same quarter last year. LCC Chairman and CEO Doug Parker told analysts last Wednesday that the synergies of acquiring American Airlines out of bankruptcy would generate $1.2 billion a year. [4.5 points]

Performance: US Airways fell two points in the AQR rating, from 6th place to 8th. [1]

Perception: 5% of frequent flyers chose LCC as their preferred airline. [2].

Total: 7.5 points

Notes: You can talk about fuel prices, fares, fees and capacity discipline, but the elephant in the room at LCC is the carrier’s play to acquire American Airlines parent AMR Corp. (PINK:AAMRQ) out of Chapter 11. In the Q1 earnings call, Chairman and CEO Doug Parker said a US Airways-AMR merger would yield at least $1.2 billion in synergies because the combined network “could generate much more revenue than the two airlines can independently.”

Although AMR Corp. CEO Tom Horton has repeatedly said his goal is for American to emerge from bankruptcy as a standalone entity, it seems he might be forced to consider the alternative. Testifying before the U.S. Bankruptcy Court in Manhattan on Thursday, investment banker David Resnick said American likely would consider a merger before exiting Chapter 11 because it is required to seek out the best value for shareholders.

Including a 5% run-up Friday, LCC shares have almost doubled year-to-date to above $10, matching 52-week highs set early last year. And its PEG of 1.6 suggests it might be a little overbought. US Airways is a high-wire act right now. In the event of an American-US Air merger, LCC stock could easily hit $17; but if American manages to wiggle of the hook, the expectation-buoyed share prices could quickly deflate to $6.

If you’ve got LCC, hold it, but whether this stock is a buy depends on your investment horizon and your risk tolerance.

United Continental

United Continental UALFinancial: United Continental (NYSE:UAL) lost $448 million on revenue of $8.6 billion in the first quarter, largely on Continental integration expenses and high fuel costs. A major computer system fiasco delayed flights and sold tickets at incorrect — and lower — fares. [1 point]

Performance: United stayed even at 12th in the AQR survey; Continental fell from last year’s sixth place to 11th. [1]

Perception: 12% of frequent flyers chose United as their preferred airline; 6% chose Continental. [4].

Total: 6 points

Stock Notes: UAL’s earnings are a great illustration of the “devil in the details” of airline mergers. In May 2011, a computer glitch in a future schedule briefly reinstated United Flights 93 and 175 — two of the flights that were hijacked and crashed by terrorists on 9/11. It created a PR nightmare for the airline. Last month, when UAL merged the formerly separate frequent flyer programs, a fiasco ensued, cascading into flight delays, check-in glitches and even phone-based service troubles. That’s in addition to the 49 cents per share in other merger-related costs and charges. Fuel prices are eating the airline’s lunch, too.

Still, at around $22 per share, UAL has enjoyed a nice 17% run in 2012, though still slightly in the red over the past 52 weeks. Like LCC, United Continental has an overvalued PEG ratio of 1.6.

UAL likely will struggle with integration issues for at least the next four quarters. By that time, it could have lost considerable competitive altitude to DAL, LUV and possibly LCC. I can’t support a buy on UAL until it gets its integration act together.

American Airlines

American Airlines AAMRQFinancial: American parent AMR Corp. (PINK:AAMRQ) lost $1.7 billion ($4.95 per share) on revenue of about $6 billion. The lion’s share of the losses stemmed from bankruptcy-related costs and higher fuel expenses. [1 point]

Performance: American and its American Eagle subsidiary each moved up a point in the AQR ratings, but both are still pretty far down the list. American rose from 11th place to 10th; American Eagle improved from 16th to 15th. [2]

Perception: 11% of frequent flyers chose American as their preferred airline, but no survey respondent chose American Eagle. [3].

Total: 6 points

Stock Notes: American is in a very tough place right now. It risks losing the right to control its destiny if its other unsecured creditors are sold on the value that potentially could be created by a merger. But in today’s airline marketplace, it’s hard to imagine a realistic scenario under which AAMRQ emerges from Chapter 11 as a strong, competitive standalone carrier.

One positive for American: the sweet financing deals with Boeing and Airbus for 460 new fuel-efficient planes. The planes, which could slash fuel costs by more than 15%, would go a long way toward giving the airline a competitive edge.

Still, for right now, AAMRQ is a stock trading on the pink sheets for around 60 cents per share. This is a very deep trough to dig out of on its own. If American emerges from Chapter 11 alone, it will be on the mat at least until the second half of 2013, probably longer. If LCC steps in to acquire it, the “AirTran effect” is possible — American’s rankings, and US Air’s, will improve. But I don’t see a play on AAMRQ right now — and if I wanted to bet on a resurrection, I’d go long LCC.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2012/04/airline-scorecard-how-do-these-6-carriers-stack-up-after-earnings/.

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