With its launch of Ted in Denver last month, United Airlines parent UAL Corp. (OTC BB: UALAQ.OB) is the latest entrant into the increasingly crowded low-cost segment of the airline industry. Yesterday morning at J.P. Morgan Chase's
Chief Financial Officer Jeff Brace was upbeat about Ted's strategy and early results. He noted that its cost structure was "similar" to that of Ted's primary low-fare competition in Denver, Frontier Airlines
Brace also said he was flattered by comments made by low-fare carriers in a recent New York Times article. The article highlighted efforts by an organization of low-fare airlines to oppose a number of government supports sought by United in its bankruptcy restructuring plan, including $1.6 billion in federal loan guarantees and measures to stretch out delinquent pension obligations.
The competition is obviously taking Ted seriously. The lobbying organization includes JetBlue Airways
Brace noted that Ted was primarily a replacement for its main-line service to leisure destinations -- a defensive move to address the market-share loss to low-cost carriers. He conceded that expansion to new routes would be limited and only "opportunistic."
Despite yesterday's bullish comments by the CFO, United's stock should not even be a consideration for individual investors. The company also just released its 10-K, which explicitly states that the company expects its common stock to have "no value" after the bankruptcy reorganization. Shares are down 40% today on that happy bit of news.
On the other hand, Southwest and the other low-cost carriers still have significant growth potential as they continue to take customers from traditional airlines. A key question for investors looking at these stocks is whether the market is accurately reflecting the potential for share gains in the stock prices. For example, although Southwest stock is 30% below its 52-week high of almost $20, it still trades at a price-to-earnings ratio of 19 and a price-to-sales ratio of 2.2. Assessing the impact of defensive moves like United's introduction of Ted is critical to making those valuation calls.
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Although he lives in Denver, Fool Contributor Salim Haji has yet to fly on Ted. He owns no shares of any company mentioned in this article.