Smaller, smaller, smaller
The thing is, it’s not just the big boys showing tiny margins. The fact that there’s too much capacity for the available traffic is driving the margins. Media darlings like Southwest Airlines Co. (NYSE:LUV) aren’t really bringing home the bacon. Even with all the positive press it gets, Southwest is still looking at a sub-2% margin and EPS below a dollar. Still, shares have grown, and I’m happier with Southwest as an investment option than with the three bigger firms above.
Another one to look at is JetBlue Airways Corporation (NASDAQ:JBLU). I have a former investment client that is a pilot for JetBlue and put almost everything he had into the company. That’s admirably loyal, but personally silly. JetBlue is another carrier that’s not sporting a great profit margin nor is the EPS of 0.35 anything for investors to get intrigued by. Yet again, the company’s shares have grown. But again, illusion.
The Future Is Flawed
The simple fact, as I alluded to above, is that there’s overcapacity out there in the airline industry in the United States. Too many carriers serving too few customers and – in all honesty – offering terrible service and increasing fees. The only thing that’s going to rescue some – not all – of these firms from going under is when some of them DO go under. That’s why the mergers of United Continental Holdings Inc (NYSE:UAL) and US Airways Group, Inc. (NYSE:LCC)/American aren’t going to address the problem. The mergers won’t really reduce capacity, just combine it in fewer hands. There needs to be fewer routes being flown on a daily basis for capacity to meet demand and promote prices and profits. Until that happens, there’s very little need for an individual investor to seriously consider investing in an airline.
The article The American/US Airways Merger Solves Nothing originally appeared on Fool.com.
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