Dear Legacy Airlines: We Still Hate You

You don't need our Motley Fool CAPS database to know that investors loathe airlines about as much as some customers do. But if you did check in at CAPS, you'd find Fools rate the entire sector just two of five stars. Only one, Germany's Lufthansa, rates four stars.

American carriers rate poorly on the whole, not just among Fools. Of the major carriers only Southwest Airlines (NYSE: LUV  ) rated "good" in terms of total experience, according to a survey of 10,000 U.S. consumers conducted by the Temkin Group:

Carrier

Poor

OK

Good

Southwest Airlines

 

 

X

AirTran Airways

 

X

 

JetBlue Airlines

 

X

 

Alaska Airlines

 

X

 

Delta Air Lines

X

 

 

Continental Airlines

X

 

 

United Airlines

X

 

 

American Airlines

X

 

 

US Airways

X

 

 

Source: Temkin Group.

This isn't very surprising, given history. Last year, an anonymous Southwest pilot held his plane at the gate so a late passenger could fly to see his dying grandson. Management applauded the generous and no doubt costly decision as reflective of Southwest's commitment to great service.

On the other end of the spectrum, bankrupt AMR, parent of American Airlines and its smaller partner, American Eagle, disappointed many during the recently completed holiday travel season as the carrier ranked last in handling baggage during 2011. But does a reputation for delivering a below-average experience equate to poor financial performance? Usually yes, but not always:

Carrier

Revenue Growth (over prior year)

Gross Margin

Return on Capital

Southwest Airlines

29.4%

21.8%

5.1%

JetBlue Airlines

19.2%

28.6%

4.3%

Alaska Airlines

12.7%

27.2%

12.6%

Delta Air Lines

10.6%

20.1%

9.7%

United Continental

58.6%

26.7%

9.2%

AMR Corp.

8.2%

19.7%

(3.3%)

US Airways

9.6%

18.2%

6.1%

Source: S&P Capital IQ.

While Southwest has the second greatest growth, its "bags fly free" policy may be cutting into gross margin while returns on capital have declined as fuel prices continue to soar. JetBlue suffers from a similar affliction but also enjoys substantially better gross margins.

The legacy carriers are more of a mystery. US Airways (NYSE: LCC  ) suffers from the lowest rankings among the majors, yet thin margins and comparatively anemic revenue growth haven't hurt the carrier's ability to produce an above-average return on capital.

United Continental (NYSE: UAL  ) is equally confusing. Low ratings mattered little last year as the combined carrier produced industry-best revenue growth and top-tier gross and returns on capital.

Of them all, only Alaska Airlines (NYSE: ALK  ) has proven to be an outperformer for investors over the past year -- a carrier customers characterize as just "OK." The message? Investors can't rely on service metrics as indicators of market outperformance or underperformance.

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2012, at 4:09 PM, stevefilson wrote:

    Dear airline de-regulation, we still hate you.

    Signed, The Airlines

    Airlines are never going to change under the current market system. Period. 30 years of de-regulation is enough time to know what we've got for the future. Low prices and crummy service are here to stay in the US airlines.

  • Report this Comment On February 27, 2012, at 4:17 PM, Whoopdedoo wrote:

    Did you know that Lufthansa and Luv pay their employees the most out of any pax airline? Also, both airlines are heavily unionized . Look it up. I would be happy to serve pax if I was paid that well.

  • Report this Comment On February 27, 2012, at 5:39 PM, busterjde wrote:

    The reason why United was so high was because of its merger with Continental. It's revenue grew that much because the combined airline fixed its route structure to be even more efficient and because there were that many more planes than the year before.

  • Report this Comment On February 28, 2012, at 6:22 PM, Camacam wrote:

    Bags fly free is a tactical decision to reduce bin stuffing and overly crowded cabins. It allows LUV to continue its phenomenal ability to turn planes around and get them back in the air. In that way it makes better use of its capital equipment than the other airlines. A plane on the ground is capital that is not at work!

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