United Continental Holdings Inc (UAL), US Airways Group, Inc. (LCC): In Search of a Reasonable Airline P/E Ratio

US Airways Group, Inc. (NYSE:LCC) throws an additional piece into the mix. While the merger with American Airlines should help in the realization of economies of scale and building a greater international presence in the long run, it is likely to impact near-term earnings with merger-related costs similar to what occurred at United Continental Holdings Inc (NYSE:UAL). Investors gave United Continental Holdings Inc (NYSE:UAL) a break realizing these were one-time expenses but a lack of strong earnings to display could hurt the new American’s chances of moving higher based only on a P/E ratio. Investors will need to monitor the merger of US Airways and American to see how the integration plays out and how the market reacts.

Acceptable P/E

While Delta’s P/E ratio of 18.4 times represents that of an airline with a completed merger, it is likely that the market is partially valuing Delta on future earnings, which are expected to sharply rise. Therefore, an 18.4 times P/E ratio should not be expected for airline shares in the future. A more reasonable P/E ratio may be closer to 10, as an approximation. This would still leave airline shares plenty of room to run, and if the industry can grow earnings at the rate analyst estimates forecast, then an increase in the value of airlines would seem to be reasonable. As always, airlines are riskier investments, and those willing to accept risks are more likely to see the rewards. Personally, I have some shares and options on Delta and US Airways Group, Inc. (NYSE:LCC) in the more speculative part of my portfolio. But potential investors should determine for themselves whether airline investments fit in a part of a broader investment strategy, and valuations for airlines are a good place to start.

The article In Search of a Reasonable Airline P/E Ratio originally appeared on Fool.com.

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