Should Investors Take a Ride on US Airways Group, Inc. (LCC)?

Unfortunately, another merger will not change the fact that the industry is highly leveraged and is susceptible to work stoppages by its highly paid, mostly unionized workforce. In addition, the industry’s companies have high capital expenditure requirements and significant pension funding problems. A better investment approach would be to seek out the tertiary companies that are benefiting from a surge in travel. One of the best positioned companies in travel services is Tripadvisor Inc (NASDAQ:TRIP).

Founded in 2000, the company is one of the world’s largest online travel companies, with roughly 50 million monthly unique visitors and 75 million user reviews of lodging accommodations, restaurants, and destinations around the world. It has also been aggressively moving into the mobile space, with TripAdvisor reporting that 45 million people were using its smartphone application as of December 2012. While the company still receives over a quarter of its total revenue from former parent Expedia, it has been diversifying into related growing segments, including subscription-based business listings and vacation rentals.

In FY2012, TripAdvisor reported increases in revenues and adjusted operating income of 19.8% and 9.2%, respectively, versus the prior year. While growth in the company’s core advertising business slowed down during the period, it generated a 58.8% increase in its subscription-based segment with sharp increases in the number of property and business listings. More importantly, TripAdvisor’s operating cash flow continues to be very strong, with $239 million generated in FY2012, which it is using to enhance shareholder value through share repurchases.

The potential merger between US Airways and American Airlines takes out another competitor, which would likely improve profitability and pricing for the surviving companies. However, the industry’s cost structure remains highly risky and is dependent on reasonable fuel prices. Given continued growth in the online travel business, investors should focus on this segment and take a ride with TripAdvisor.

The article Should Investors Take a Ride on this Airline? originally appeared on Fool.com and is written by Robert Hanley.

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