Always Ask What Your Airline Can Do For You: Delta Air Lines, Inc. (DAL), Southwest Airlines Co. (LUV)

Page 1 of 2

“How do you make a million dollars? You first make a billion dollars and then invest them in airline companies.” (Warren Buffett)

This phrase by the sage is pretty much spot on. Airline stocks in general have performed awfully over the last decade. In fact, shares of most airlines trade today at the same price they traded back in 2000. This business is shrinking and with good reason.

The airline business is a terrible business. It’s extremely capital intensive, prone to recessions and highly sensitive to the price of fuel, the industry’s main raw material.

Delta Air Lines, Inc. (NYSE:DAL)

The urge to merge

Fierce competition, decreasing passenger ticket rates and high maintenance costs have been leading many airline companies straight to the warm embrace of Chapter 11. After (and if…) a company emerges from bankruptcy, it’s usually a leaner and much more efficient rival in the industry because much of its debt load is eliminated.

Many other rivals simply prefer to merge in order to share the high costs. In the past couple of years, the market has witnessed various mega mergers such as Delta Air Lines, Inc. (NYSE:DAL) and Northwest, Southwest Airlines Co. (NYSE:LUV) with AirTran, and United Continental Holdings Inc (NYSE:UAL) with Continental. In the post -merger era, the first couple will control 20.5% of total domestic market share with a market cap of $11 billion. The second couple will control 12% of total domestic market share with a market cap of $8 billion. And the third couple will represent 21% of total domestic share, with a market cap of $8.6 billion.

In terms of profitability, things seem less rosy — gross operating profit margin for the above trio stand at 8.1%, 5.2% and 4.5%, respectively.

Lately, another mega merger was announced — a merger between American Airlines and the much leaner U.S Airways . Whereas the former has just emerged from bankruptcy, the latter is one of the most efficient and cheap airlines out there. U.S Airways trades at a measly P/E of only 4.5x, with gross operating margin and return on assets of 6.4% and 6.2%, respectively. This merger creates the world’s biggest airline company.

What does the future have in store?

On the consumer front, fewer competitors usually spell less competition and higher air fares. But we are much more interested in the investing thesis behind this merger. There are a few key points that frustrated past airline investors might look up to:

    1. Little overlap: Often times, two airline companies buy one another only to end up with the same flight routes. That isn’t the case here. US Airways Group, Inc. (NYSE:LCC) and American overlap on only a dozen routes. Together, they control most of the U.S air space and control 24% of total domestic market share. Such a high dominance is sure to translate into more customers bringing more revenue. The companies stated that they expect to bring in additional $900 million of revenue.
Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!