As we know, the $192 billion U.S. airline industry market is highly competitive. And this high competition puts a strong pressure on margins, making it impossible for companies to increase prices unilaterally. It is a situation that forces everyone involved to put a strong focus on costs, making a thorough analysis of its structure to squeeze every possible penny.
For the past few years, the industry faced a series of big acquisitions and mergers. I will go through three companies that have shown changes in this matter lately and give my opinion on their future outlook.
Challenges in investments
Southwest Airlines Co. (NYSE:LUV) only operates within U.S. territory, reducing exposure to other routes. However, if we compare Southwest and the rest of the industry, the indicators are not very favorable for the company. Southwest Airlines Co. (NYSE:LUV)’s P/E ratio has reached 14.0 while the industry average is locked in at 11.8. Furthermore, its EV/EBITDA is 6.0 and if we compare it with the whole sector, we find it at 6.8. This reveals that the company is showing a higher share price than its peers.
In spite of this, the company started a mid-term investment plan, which includes the acquisition of AirTran Holdings in May 2011. Since then, Southwest Airlines Co. (NYSE:LUV) began integrating operations and started an expansion process towards foreign markets to be finished in 2015. This expansion will augment the company’s exposure, but also increase income.
In order to cope with high competition, Southwest Airlines Co. (NYSE:LUV) is investing in optimizing and renovating its fleet. Apart from the upgrade of 89 Boeing 737-700s of its fleet, the company has also acquired 9 new Boeing 737-800s and 2 used Boeing 737-700s.
These initiatives are driving better results for the company. EPS growth in the first quarter has shown a rise from -$0.02 to $0.07 and is expected to keep having a positive trend throughout the rest of the year.
Results of the merge
Delta Air Lines, Inc. (NYSE:DAL) is the second largest American airline and operates in regional and international markets. After having completed its merging process with Northwest Airlines in December 2012, the company announced its plans to buy a 49% stake of Virgin Atlantic, which would position Delta Airlines in big markets such as the London-New York route and the pacific northwest circuit as it is projected.