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2 Airline Stocks to Consider for Your Portfolio

May 01, 2014 | About:
Rustic Nomad

Rustic Nomad

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The aviation industry is expected to perform well in the future. Analysts expect aviation stocks to move impressively in the stock market. Estimates put the size of the aviation industry at $3.5 billion by 2016. With these expectations, many operators will try to improve their operations to get hold of this handsome growth opportunity. Southwest Airlines (LUV) and Delta Air Lines (DAL) are two companies in this sector that deserve a close look.

Can Southwest Take Off?

Southwest is a regional operator that focuses on domestic flights. The company holds a distinct edge in the market as it has the image of being the most profitable low-cost airline in the world. The airliner is expecting a better performance in the future by delivering higher growth in the revenue through its different strategies and moves. The company is improving operational efficiencies by introducing various customer-friendly programs and by focusing on the optimization of its network.

Taking a close look at the strategies, Southwest's All-New Rapid Rewards Program and supplementary products such as pet fees and Early Bird check-in are expected to attract more customers to the airlines. But the airline company is also expecting certain challenges. Southwest is worried about higher operating costs as a result of maintenance, salary and wages, airport fees and aggressive advertising. These are some of the challenges that can lead Southwest to face stiff competition from peers.

To fight the existing challenges, Southwest is geared up with many strategic moves. It has retired two 737-300 Boeings and added three 737-800 jets to service, which will add more value to the airline company.

Southwest has come up with a strategy to cover up for empty seats. It has implemented a “No Show policy” and “Lost Ticket” scheme, under which, if a customer fails to change or cancel tickets 10 minutes prior to travel and fails to board the flight, he/she will be termed as “no show” and no refund will be provided. In case of a lost ticket, no replacement or refund would be provided, and new tickets will have to be purchased at appropriate fare charges.

Besides these moves, Southwest also has a strong share repurchase program of $1.5 billion, which is expected to raise Southwest’s earnings in the future, giving it a better position in the aviation industry.

A Closer Look at Delta

Delta Air Lines, which is the second largest carrier after Southwest, is also working aggressively to improve its competitive edge in the market. Delta is focusing on expanding its services by launching non-stop seasonal flights to Aspen, Colo. Delta is making constant moves to expand in the aviation business by adding daily services from Atlanta, which will also have flights every Saturday from Minneapolis-St. Paul. Besides this, the approval of the Delta and Virgin Atlantic venture has proved to be a growth driver for Delta, enabling it to drive profits from the New York-London route.

Studies have revealed that Delta is a market leader in domestic airline services. Delta has enjoyed a market leading position in the past, having 16.3% market share. Besides, Delta enjoys an added advantage of having daily non-stop services between one of the top global skiing destinations and Southeastern U.S., which is expected to benefit Delta in the future.

This will offer better connectivity between the destinations, making it convenient for travelers. Delta also acquired a 49% stake in British carrier Virgin Atlantic from Singapore Airlines. Delta has also established its stronghold over the New York-London air route. The service is expected to prove lucrative to Delta’s earnings.

Conclusion

Looking at the ratios, Delta looks cheaper than Southwest with a trailing P/E of 3, while Southwest has a trailing P/E of 20. Both companies are well-positioned for the future with aggressive strategies. But Delta’s route expansion plans look very interesting. So, in my opinion, Delta is a better pick than Southwest.


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