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:

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.

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.