Cream Rises to the Top in the Airline Industry

Many of the top U.S. airlines had a rough spring, but they all bounced back with a very strong summer travel season. In July and August, the five largest U.S. carriers posted strong unit revenue growth across the board.

However, travel demand drops off after Labor Day, which creates a more challenging environment for the airlines, as I warned during the summer. Thus, I was not surprised to learn that the strongest companies in the industry prospered last month, while weaker ones suffered. Here are last month's unit revenue results for the top five airlines:

Airline

Unit Revenue Change

Capacity Change

AMR (NASDAQOTH: AAMRQ  )

Up 3.2%

Up 1.9%

Delta Air Lines (NYSE: DAL  )

Up 5.5%

Up 1.7%

Southwest Airlines (NYSE: LUV  )

Up 7%-8%

Up 1.2%

United Continental (NYSE: UAL  )

Flat

Up 0.2%

US Airways (NYSE: LCC  )

Up 6%

Up 3.2%

Source: Airline press releases 

A few winners

Whereas everybody was a winner in June and July, the coming of fall quickly showed that some airlines are the "real thing," while others are just pretenders. Delta and US Airways have been top performers all year long, and they continued their strength in September with mid-single digit unit revenue gains.

Delta had another strong revenue performance last month.

Southwest has had a bumpier performance this year, in part due to the difficulty of integrating AirTran into the Southwest brand. However, its solid results over the summer and its strong September unit revenue suggest that Southwest is back at the top of its game. That's great news for investors, and it's been reflected in Southwest's stock price, which hit a 5-year high this week.

LUV Chart

Southwest Airlines 10 Year Price Chart, data by YCharts.

The biggest loser

AMR posted a smaller unit revenue gain than most of its peers, perhaps weighed down by a new wave of speculation about its future. With the DOJ suing to stop AMR's proposed merger with US Airways, some customers may be nervous about relying on American Airlines for their travel needs.

However, the real loser last month -- by far -- was United Airlines. United experienced a headwind of more than 1% from a one-time revenue adjustment on interline tickets, but it would have trailed all of its top four competitors by a long way, even without that effect.

United Airlines trailed the industry in terms of unit revenue growth last month (Photo: United Airlines).

United also blamed its weak results on an increase in competitive capacity between China and the U.S. While I'm sure this played a role, it can't fully explain why United trailed competitors in unit revenue growth by around 5 percentage points. Customers are looking for alternatives to United, and Delta in particular seems to be eating United's lunch.

Recently, United's typical reaction to competitive threats has been to go on the offensive. It did this back in the spring, when it nearly doubled capacity on two routes from Newark Airport after Virgin America broke its monopolies. Similarly, United announced new flights that target Delta's hubs this week . However, it might be wiser for United to retrench and focus on pleasing its core customers, rather than lashing out at competitors.

Foolish bottom line

The coming of fall effectively showed investors which airlines are the real deal, and which are not ready for prime time. Delta and US Airways remained strong, as they have been for most of 2013, and Southwest showed that it is still a force to be reckoned with. By contrast, United considerably trailed the industry in terms of unit revenue growth. If this trend continues into Q4, United investors could be in for a lot of pain.

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Read/Post Comments (5) | Recommend This Article (0)

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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 October 09, 2013, at 1:34 PM, timmy1234 wrote:

    I fly Delta most of the time and although I read many gripes about on time performance, cabin service and hard core flight attendants, I have never experienced any issues. They always have the best fares and cabin service. One time on AA and my flight was cancelled.

  • Report this Comment On October 09, 2013, at 2:15 PM, UAgoldmember wrote:

    United is treating their frequent flyers like an inconvenience rather than valued customers. It no longer makes sense to be a loyal United customer because of the degradation of the Mileage Plus program. The arrogant former Continental management bankrupted their airline and are now on course to do the same at United.

  • Report this Comment On October 09, 2013, at 3:08 PM, cdkeli wrote:

    The title of this article must be a joke - it has to be - no one is that gullible, surely??

  • Report this Comment On October 09, 2013, at 3:27 PM, masdstel wrote:

    Done a lot of flying - and United seems to look at passengers - at least in my experience - as a necessary evil.

  • Report this Comment On October 09, 2013, at 11:49 PM, scottloar wrote:

    Ranking US carriers is similar to ranking Little League baseball teams; neither can stand up in the major leagues, no, not even among the worst of the major league teams.

    US carriers share the same faults to a greater or lesser degree: aged equipment, aged and grouchy cabin attendants who volunteer nothing but surly instructions, ground staff that tries to be helpful but more often countered by the attitude of some who obviously do not value their employment, and inedible food in economy class, intercontinental flights (that for domestic flights is worse than inedible). Why not look to those carriers who have made reputations like Qatar, Cathay Pacific, Singapore Airlines, Asiana, Emirates? Even the discount carriers like Air Asia give more respectful treatment to their passengers than United Airlines which "seems to look at passengers... as a necessary evil".

    Sincerely,

    100K+/yearly International Traveler

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