The aviation industry is on the brink of achieving $3.5 billion in revenue by the end of 2016 and many airlines operators are actively and strategically engaged to maximize their share of the market. And Investors who are probably looking to invest in the airline industry should focus on merger and acquisitions of the smaller airlines by the bigger airlines, as it should increase shareholder value.
Such was the case with the merger between American Airlines and US Airways that were confronted with many problems. Therefore, investors should keep an eye on the airlines stocks. There are two stocks that have potential growth in the coming years and are ought to benefit the investors.
Southwest to Take Off
Southwest Airlines (LUV, Financial)’s share expanded about 47% so far this year fuelled by strong performances and adequate strategies that helped the company to increase its margin. Southwest Airlines is a regional operator with undue importance on domestic flights, point-to-point and low fare services. Another interesting feature that differentiates LUV from others is its leveraged low-cost business model that has driven its growth in the past and is expected to drive traction in the market.
Having observed the current trends, the airline is expected to benefit from the growth of its unit revenue in the future, which should help in appreciating its stock price in the coming year. Besides, Southwest Airlines is engaged in improving its efficiencies in operations, optimizing its network and enhancing its capacity management as it plans to introduce many new customer-friendly programs should collectively assist the company to increase its margin the coming years.
These customer-friendly programs such as All-New Rapid Rewards Program and Supplementary products like pet fees and EarlyBird check in are anticipated a turnaround for the airline operator as the company is determined to practice these initiatives consistently for next three years and get best results out of this that could increase its profitability in during this period.
However, Southwest has to effectively deal with higher operating costs incurred from maintenance, salary & wages, airport fees and has to invest aggressively in marketing and sales as these could hamper its growth along with intense competition in the segment if it fails to do so.
In order to better combat Southwest Airlines has retired two 737-300 Boeings and added three 737-800 jets to service. The company further plans to expand its network by integrating AirTran aircraft with the addition of new domestic and international destinations based on its cost-efficient business model that should help the company to penetrate in the market and earn extra market share.
Also, Southwest Airlines has come out with impressive initiatives to cover up the empty seats such as “No Show policy” & “lost Ticket.” Under the no show policy, 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 Lost Ticket, no replacement or refund would be provided and new tickets will have to be purchased at appropriate fare charges.
In addition, Southwest Airlines has accelerated its share repurchase program from $1 billion to $1.5 billion. In the last quarter, the airline repurchased 18 million shares worth around $251 million. Also, it paid dividends worth $28 million.
A Look at Delta
Delta Air Lines (DAL, Financial) could be another great pick in the aviation industry. Delta is one of the largest carriers in the U.S. It recently extended its services and launched a daily non-stop service between Seattle and London. Delta also plans to expand its services for Colorado at Aspen and will be launching non-stop seasonal flight.
Also, there is a lot more happening at Delta as it launched flights every Saturday from Minneapolis-St. Paul that will certainly an added advantage to daily services from Atlanta. These strategic initiatives have helped the company to build well-diversified network with usual high-class customer service. Moreover, the airlines is engaged constantly for expanding its business line to cater to the travelers’ demand that will help the company to yield better margin in the next few years.
Delta Airlines, in last September, was relieved when Department of Transportation (DoT), approved its joint venture with Virgin Atlantic Airways for routes connecting North America and the U.K. This approval will definitely enable Delta to reap the benefit of the lucrative New York-London route and Delta.
Delta on the other hand also acquire 49% stake in British carrier Virgin Atlantic from Singapore Airlines that assisted the company to have a strong grip over its New-York- London route- one of the biggest itineraries across the globe. Delta plans to start its service early next year that should prove accretive to Delta’s earnings. Delta’s stock has been rolling over as it surged approximately 112%, and it won’t be surprising to see further gains on the back of its strategies.
Also, Delta was the market leader in the domestic airlines market (July 2012 – June 2013). It had enjoyed 16.3% of the market share in domestic airlines. Delta has the privilege of being the first and only airline to have daily non-stop service between one of the top global skiing destinations and Southeastern U.S. This together will positively offer enhanced connectivity between the destinations, and will make it convenient for travelers.
Conclusion
Both the airliners have been following different strategies to grow. But in my opinion, Delta looks better positioned of the two. At a trailing P/E ratio of 11.8, Delta is cheaper than Southwest, which has a 28.8x multiple. Moreover, Delta’s route expansion plans look very interesting and it won’t be surprising if the company continues to outperform Southwest in the future.
