Will The Big Airlines Continue To Have Bullish Performance?

by: Benjamin Goldman

US Airways Group (LCC) shares have been extremely bullish as of late, increasing in price more than 125 percent over a six-month span at the close of trading on May 11th. Many investors feared that US Airways was heading toward bankruptcy much like AMR Corporation (AAMRQ.PK) did last November. Now that the airline industry is back on the road to profitability and the bankruptcy fears have gone away, the new question is if this bull run will continue.

Airlines have had a long history of struggling, going bankrupt, merging, and getting back on their feet. It appears that the "getting back on their feet" part of the cycle has only been happening with the larger airlines as of late. In addition to US Airways shares trading 41.8 percent above its 50-day moving average, Delta Air Lines (NYSE:DAL) and United Continental Holdings (NYSE:UAL) have also been doing well, trading 13.6 percent and 12.8 percent above their 50-day moving averages, respectively. The airlines with better reputations and customer service like Alaska Air Group (NYSE:ALK) and Southwest Airlines (NYSE:LUV) have not enjoyed the same bull run as both of their shares are trading just below their 50-day moving averages.

Airline Proj. 2012 Revenue Market Cap Revenue/Market Cap
Delta Airlines $36.9B $9.66B 3.82
United Continental $38.5B $8.01B 4.81
Southwest Airlines $17.4B $6.18B 2.82
Alaska Air Group $4.7B $2.44B 1.93
US Airways $13.9B $1.84B 7.55
Jet Blue Airways $5.1B $1.36B 3.75
American Airlines $24.9B $0.17B 146.47

The graph above is a quick view at how Revenue/Market Cap varies greatly across the airline industry. This difference obviously stems from these airlines' differences in profitability, but there are some other important metrics that manipulate the Revenue/Market Cap ratio. One is customer service. Alaska Air Group has the lowest Revenue/Market Cap ratio and was also ranked the best in customer service in 2011 by The Middle Seat. American Airlines was ranked last. The other big metric is size. The four airlines with the highest ratios, Delta, United, US Air, and American Airlines, are commonly known as the "Big Four" airlines. The three "niche" airlines are known to be the most profitable. Despite Southwest having more revenue than US Airways, it is still described by many as a niche airline because of its unique business model.

In the near future, I believe that US Airways, Delta Airlines, and United Continental will all continue to outperform the market for at least another year. Their expected earnings going forward justify a higher stock price and bearish trading in the past has made shares very cheap. In addition, a potential merger of US Airways and American Airlines could add substantial economies of scale. I believe that Alaska Air, Southwest, and Jet Blue (NASDAQ:JBLU) are the better run companies, but investors have known this all along and their stocks are appropriately priced. Look for the larger airlines to put more emphasis on customer services and start acting like the little guys. Soon enough, their Revenue/Market Cap ratios should converge.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.