The history of commercial aviation in the United States is instructive. It comes with iconic heroes such as Charles Lindbergh and Amelia Earhart. There are parallels with both the computer and auto industries in that we can trace the introduction of a disruptive technology with clear market leaders to a commoditized market that leads to consolidation and the death of companies. The early years of commercial aviation, the 1920's and 1930's, saw the start of such storied companies as Eastern Airlines and Pan American World Airways, both of which lasted until 1991. The list of U.S. carriers continues to shrink.
Even as we write this article, U.S. Airways (LCC) has filed with the SEC an 8K to start the process of acquiring American Airlines which is in bankruptcy. American Airlines wants to remain independent and intends to seek court approval to void existing labor contracts. Separately, U.S. Airways has negotiated with three unions representing American Airline employees and has garnered union support for U.S. Airways' proposed merger.
The airline industry has a long history of turmoil, consolidation, and bankruptcy. High labor and fuel costs pose constant threats to each company. The requirement for high capital expenditures and regulatory oversight pose additional burdens on this industry. This article will examine the viability of the remaining carriers and their potential survivability.
In this exercise, we will utilize the Altman Z"-Score model for publicly-traded "service" industry companies. This model was modified for service industry companies by Altman, a professor of finance at New York University and is based on his original model for manufacturing companies.
The model is built around four financial ratios:
z" = Overall index
x1 = Net working capital / total assets
x2 = Retained earnings / total assets
x3 = Earnings before interest and income taxes / total assets
x4 = Book value of common equity / book value of total liabilities
Z"-Scores are then categorized by degree of risk of bankruptcy: a score greater than 2.60 is considered "safe." A Z"-score in the 1.10 - 2.59 range is considered a "gray" area zone and companies in the "distressed" zone have scores less than 1.10. The Altman Z"-score model is:
Z" = 6.56 x1 + 3.26 x2 + 6.72 x3 + 1.05 x4
Click to enlarge
Of the ten companies highlighted above, only one-- Spirit (NASDAQ:SAVE) -- is clearly characterized as "safe" according to this model. Three others, Alaska Air (NYSE:ALK), SkyWest (SKYW) and Southwest (LUV) are in the "gray" zone. Delta (DAL), Hawaiian Holdings (HA), Republic (NASDAQ:RJET), UAL (NYSE:UAL) and U.S. Airways (LCC) are in serious trouble.
Alaska Air Group, Inc. is the holding company for Alaska Airlines and Horizon Air, Seattle-based carriers that collectively serve over 90 destinations in the United States, Canada, and Mexico. Alaska Air Group was organized as a Delaware corporation in 1985.
ALK reported first quarter net income, excluding special items, of $28.3 million, or $0.39 per diluted share, compared to net income of $29.5 million, or $0.40 per diluted share. This quarter's results compare to a First Call mean estimate of $0.35 per share. Recorded GAAP net income of $40.8 million, or $0.56 per diluted share, compared to net income of $74.2 million, or $1.01 per diluted share.
The company effected a 2-for-1 stock split in March, resulting in about 71 million shares outstanding. It achieved 12-month return on invested capital of 11.6 percent, compared to 11.3 percent. The debt-to-total capitalization ratio declined by 2 points, or to 60 percent, since Dec. 31, 2011.
Delta is a global passenger and freight carrier. It operates hubs out of Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita. For the year ending 12/11, DAL reported revenues of $35,115 million and net income of $854 million and compared to 12/10 sales of $31,755 million and net income of $593 million.
Hawaiian Airways started out in 1929 providing inter-island services and grew from there. Today, the company services 20 domestic and international destinations in the Pacific region. HA reported $1,650.5 million in revenues for 2011 and had a net loss of $2.6 million. In 2010, the company reported net income of $110.3 million on $1,310.1 million revenue.
JetBlue (NASDAQ:JBLU) describes itself as a "value" airline. It started operations in 2000 and currently serves 70 destinations in 22 states, Puerto Rico, Mexico and 12 countries in the Caribbean and Latin America. Revenue grew to $4,504 million in 2011 from $3,779 million in 2010. However, net income declined by 11.3% to $86 million from $97 million.
Republic Airways Holdings, based in Indianapolis, is an airline holding company that owns Chautauqua Airlines, Frontier Airlines, Republic Airlines and Shuttle America. The airlines offer scheduled passenger service on approximately 1,500 flights daily to 129 cities in 41 states, Canada, Costa Rica, and Mexico under branded operations at Frontier, and through fixed-fee airline services agreements with five major U.S. airlines. The fixed-fee flights are operated under an airline partner brand, such as AmericanConnection, Continental Express, Delta Connection, United Express and US Airways Express. The airlines currently employ approximately 11,000 aviation professionals and operate 275 jet aircraft.
The company's net loss grew to $151.8 million in 2011 from a net loss of $13.8 million in 2010 on a 7.9% revenue gain.
SkyWest, Inc. is the holding company for three scheduled passenger airline operations and an aircraft leasing company and is headquartered in St. George, Utah. SkyWest, Inc.'s scheduled passenger airline operations include SkyWest Airlines, also based in St. George, Utah and ExpressJet Airlines based in Atlanta, Georgia. SkyWest Airlines operates as United Express, Delta Connection and US Airways Express under contractual agreements with United Airlines, Delta Air Lines and US Airways, respectively.
Also, SkyWest Airlines operates flights for Alaska Airlines under a contractual agreement. ExpressJet operates as United Express, Continental Connection and Delta Connection under contractual agreements with United/Continental and Delta Air Lines, respectively. ExpressJet Airlines was created with the merging of Atlantic Southeast and ExpressJet Airlines in 2011. System-wide, SkyWest, Inc. carriers serve markets in the United States, Canada, Mexico and the Caribbean with approximately 4,000 daily departures and a fleet of approximately 726 regional aircraft.
SkyWest saw revenues increase by 32.2% to $3,654.9 million from $2,765.1 million in 2010. The company turned a net profit of $96.4 million in 2010 to a net loss of $27.3 million in 2011.
Southwest Airlines Co. (Southwest) is a low-fare major domestic airline. Southwest was incorporated in Texas and commenced Customer Service on June 18, 1971 with three Boeing 737 aircraft serving three Texas cities -- Dallas, Houston, and San Antonio. Today, Southwest is the nation's largest carrier in terms of originating domestic passengers boarded, serving 73 cities in 38 states. On May 2, 2011, Southwest completed the acquisition of AirTran Holdings, Inc., and now operates AirTran Airways as a wholly owned subsidiary.
Southwest reported 1Q12 revenues of $3,991 million and $98 million in net income. For the trailing twelve months, net income increased to $272 million as compared to $178 million in FY11.
Spirit Airlines calls itself an ultra low-cost; it is based in Miramar, Florida and provides routes principally throughout the domestic United States, the Caribbean and Latin America. Its targeted growth markets have historically been underserved by low-cost carriers, which the company believes provides it sustainable expansion opportunities. Its ultra low-cost carrier, or ULCC, business model allows it to offer a low-priced basic service combined with a range of optional services for additional fees, targeting price-sensitive travelers.
Spirit grew revenues by 31.7% to $1,071.2 million in FY11 as compared to $781.3 million in FY10. For the same period, net income grew to $76.4 million from $72.5 million or 5.4%.
United Continental operates from ten hubs and is the largest U.S. carrier to China. The combined United Airlines/Continental Airlines saw a 51.9% revenue increase to $37,000 million from the prior year's revenue of $23,325 million. Net income jumped from $252 million in FY10 to $837 million in FY11.
All the airlines share problems related to volatile fuel costs and the impact of the economy on both business and leisure travel. Additionally, companies like United Continental and the others merging or acquiring other carriers also assume the risks and costs associated with the acquired company. Labor agreements, unfunded pensions and regulatory overhead all provide additional risk for an industry that history shows us is already risk-prone.
Disclosure: I am long ALK.