This year has been an eventful one for airlines as the largest-ever airline merger looks to be reshaping the industry, solid profits show an industry turnaround, and stock prices among airlines are leading to market-beating gains for many shareholders. As we approach the end of the year, it's time to look back on what's happened and what it means for 2014 and beyond.
Biggest news first
The year began with US Airways continuing its push to acquire bankrupt American Airlines parent company AMR, and will end with the beginnings of integration at the new American Airlines Group (NASDAQ:AAL).
But the path wasn't smooth. In February the two airlines agreed to merge, but August brought a surprise antitrust lawsuit from the Department of Justice and several states. After turning shares of US Airways and AMR into roller-coaster rides, a settlement was reached in November and the new airline began trading on Dec. 9. Not only did shareholders of US Airways and AMR win, but JetBlue Airways (NASDAQ:JBLU) saw one of its best days ever as shares rallied on the potential for JetBlue to acquire new valuable slots divested as part of the settlement. In 2014 we will get to see how JetBlue works its new real estate into its network and, if executed well, an earnings boost from the expansion.
The next year looks to be an integration year for American Airlines, and investors will be watching closely to see how well the airline pulls it off. Analysts are already pinning high price targets on the airline's shares based around an improving outlook for the industry and the synergies touted during the merger.
Another merger continues
While American Airlines is beginning to become one airline, United Continental Holdings (NYSE:UAL) has been working on it since 2010. The airline's integration process has been criticized for taking too long and annoying customers with computer glitches, but 2013 marked a milestone in the integration.
In September, the pilot's union announced that a seniority list had been created. At first glance this may not seem like a big deal, but it allows a critical part of United Continental's merger synergies to proceed. Until a seniority list was created, former United pilots had to fly former United aircraft and former Continental pilots had to fly former Continental aircraft. This seniority list paves the way for a more efficient labor setup for future operations and should help the airline realize more of its merger synergies.
When Delta Air Lines (NYSE:DAL) bought an oil refinery in 2012 reactions were mixed, with some seeing it as a long-term investment in slashing fuel costs and others questioning how an airline could operate a refinery better than its previous owner.
It's taken over a year, but the Trainer Refinery registered its first quarterly profit last quarter; Delta reported a $3 million profit from the refinery. Now that operations at the refinery are up and running, it should begin to contribute more to Delta's bottom line. Over the next year investors should look for continued profit growth from the refinery. Additionally, the refinery purchase shows Delta's unique approach to running an airline; it will be interesting to see what the airline has in store for 2014.
The major airlines reported sharp earnings increases over past years, and airline shares reflected the gains. Shares of US Airways rallied 67% year to date, and have nearly doubled when the post-merger gains as American Airlines Group shares are factored in. United Continental shares rose a healthy 58%, but Delta Air Lines was the big winner among non-bankrupt legacy carriers as shares rose over 130%.
As we move into next year, airlines do not pose the same level of value they did at the beginning of 2013 -- but if industry trends continue, shares could still have room to run, with some carriers trading with single-digit forward price to earnings ratios in an industry where investor confidence is returning.
Taking the crown this year for airline share gains were shares of bankrupt AMR, parent company of American Airlines, which surged over 1300% year to date after the shares -- once thought worthless -- were given a piece of the new American Airlines Group, a rare move for companies in bankruptcy. But even this gain was largely driven by the rally in US Airways shares. Had US Airways shares remained at their levels from the beginning of 2013, AMR shareholders would be receiving far less of the new carrier.
Airlines for 2014
The airline industry saw the beginnings of the American Airlines merger in 2013, and with fewer large competitors, each carrier is developing greater pricing power. The upcoming year will give investors a look at the integration process at American Airlines, the finishing touches on the United Continental merger and, now that Delta's refinery is profitable, potentially another out-of-the-box idea from the Atlanta-based carrier.
Airline stocks stand to benefit from increased investor confidence in the industry and improving earnings over the coming year. Of course, the normal airline risks remain -- but for investors willing to take on these risks, I still see upside in this industry for 2014.
Alexander MacLennan owns shares of American Airlines Group and Delta Air Lines and has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, and long January 2015 $17 calls on American Airlines Group. 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.