Bloomberg News

Most Profitable Airlines Are Made in America as Values Surge

May 22, 2014

Delta Airlines

Delta led the world in 2013 operating income at $3.8 billion, excluding extraordinary items, a 34-fold gain from 2008. Photographer: Ron Antonelli/Bloomberg

The bankruptcies, mergers and jet-fuel shocks that rocked U.S. airlines during the last decade yielded a surprising result: the world’s most profitable carriers.

U.S. airlines led by Delta now hold the top spots in the global industry by operating income and market value, according to data compiled by Bloomberg. Just five years ago, European and Asian companies including Singapore Airlines and Lufthansa dominated the field.

Delta, American, United and Southwest pulled themselves up by junking old habits such as adding flights to win market share. Scarred by restructuring in court, the big U.S. carriers are curbing the supply of seats so they can raise fares and charge for extras that once were free. While fees and crowded planes are the bane of fliers, they’re a welcome turnabout for investors as U.S. airline shares outpace major equity indexes.

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“It’s an assortment of key components in the industry that has led to this sort of renaissance,” said Andrew Meister, an analyst at Thrivent Financial in Appleton, Wisconsin, whose airline holdings include Delta, Southwest and United Continental Holdings Inc. (UAL:US) among $38 billion in mutual-fund assets under management. “They’re saying, ‘Shoot, if this is working, let’s keep doing it.’”

The U.S. quartet emerged at the top of rankings compiled by Bloomberg that included airline-specific gauges such as the share of occupied seats. They also account for almost half the $190 billion in market value for the 20 biggest global carriers by traffic, the data show.

Loss Streak

In 2009, the industry was at the end of nine years of losses totaling $58 billion. United, Delta and American had either been through bankruptcy or were destined to end up there. Northwest Airlines reorganized in court before being gobbled up by Delta Air Lines Inc. US Airways, now part of American Airlines Group Inc. (AAL:US), had made two trips through Chapter 11.

In the wake of such upheaval, U.S. airlines did a U-turn. Executives learned to keep a lid on seating capacity so they could raise fares. Meanwhile, record domestic oil output helped damp jet-fuel prices that peaked in 2008, while a rebounding U.S. economy provided a tailwind.

“Management’s getting it figured out,” said David Dotzenroth, a former commercial pilot now on the investment team at Wayzata Investment Partners, until recently one of the biggest shareholders for Atlanta-based Delta.

Investors’ Reward

Investors who bought airline stocks after the calamities are being rewarded. The Bloomberg U.S. Airlines Index more than quadrupled in the five years through yesterday, while a gauge of global carriers gained 60 percent. The Standard & Poor’s 500 Index, the benchmark for U.S. equities, doubled in that span.

Wayzata was among the beneficiaries. Filings showed a sale of 31 million shares in the fourth quarter, when Delta averaged $26.87, and the firm unloaded its remaining 3.1 million shares last quarter, when the average price was $32.16. The Wayzata, Minnesota-based firm had held 27 million shares since at least December 2008, a month when the price averaged $10.31.

Even longtime naysayers are reconsidering their aversion to an industry that Berkshire Hathaway Inc. Chairman Warren Buffett swore off after a 1989 investment in US Airways that he later dubbed a “mistake.”

“As an investor you have to look at them,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Inc. in Cincinnati. McCormick said airlines historically lacked the consistent earnings and dividend growth he desires, and he’s still not sold on them. At the same time, “much like products, whether it be tobacco or other industries people may not like, they are starting to make money.”

Filling Seats

Airlines such as Delta and Chicago-based United have held capacity little changed or even retrenched since their mergers. Three U.S. airlines were in the top five worldwide in 2013 in average load factor, or percentage of seats filled, up from two in 2008, Bloomberg data show.

Mergers that began with America West Holdings’ acquisition of US Airways Group Inc. in 2005 have shrunk the U.S. industry to three full-service carriers, from six. Delta bought Northwest in 2008, United and Continental paired up in 2010 and Dallas-based Southwest Airlines Co. (LUV:US) purchased AirTran Airways in 2011. In December, US Airways and former American parent AMR Corp. combined to create American Airlines Group. The Fort Worth, Texas-based carrier is No. 1 in the industry by traffic.

No U.S. airlines made the top five in operating-profit margin for 2008, while three -- Delta, Southwest and American -- did so in 2013, the Bloomberg data show.

Lufthansa’s Slide

Delta led the world in 2013 operating income at $3.8 billion, excluding extraordinary items, a 34-fold gain from 2008. Cologne, Germany-based Deutsche Lufthansa AG slid to sixth place from No. 1 after a 56 percent drop to $890 million amid European economic weakness and competition from discount rivals.

In Asia, slower economic growth is crimping gains in air travel abroad, according to the International Air Transport Association. Singapore Airlines Ltd. (SIA) which slid to No. 19 in operating profit margin, at 1.9 percent, in 2013 after leading the pack at 13.8 percent in 2008.

U.S. airlines’ biggest threat now may be “hubris,” said Savanthi Syth, a Raymond James Financial Inc. analyst in St. Petersburg, Florida. “You start to believe that you can grow faster than everybody else.”

For U.S. executives, memories of last decade’s losses and equity destruction remain fresh.

While the U.S. airlines’ recovery is so new that carriers haven’t been tested by a slump, the shift in fortunes has been both sweeping and swift, Southwest Chief Executive Officer Gary Kelly said in an interview in Dallas.

“In a very short period of time, we have gone from struggling as an industry and being a struggling member within that industry, to now having a wonderful array of opportunities,” Kelly said. “It is a huge change.”

To contact the reporters on this story: Michael Sasso in Atlanta at msasso9@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net John Lear


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Companies Mentioned

  • UAL
    (United Continental Holdings Inc)
    • $64.14 USD
    • -0.11
    • -0.17%
  • AAL
    (American Airlines Group Inc)
    • $50.71 USD
    • 0.57
    • 1.12%
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