Taking a Fresh Look at the Airlines
Although we've raised our estimates, the carriers still look fairly valued.
After transferring coverage of American Airlines (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV), and United Airlines (UAL), we are maintaining our no-moat and stable moat trend ratings. However, we are raising our fair value estimates for Delta to $62 per share from $60, for Southwest to $62 per share from $58, and for United to $85 per share from $81. Collectively, the major U.S. carriers look fairly valued at our updated fair value estimates. Of the four, we prefer Delta because of the revenue premium it earns from its network breadth.
Consolidation has driven roughly 80% of U.S. domestic market share into the hands of four major carriers, partially alleviating the excess supply issue that historically plagued the airline industry and improving margins. The emergence of loyalty programs also helped push margins to new heights. By switching loyalty programs from distance-based point systems to revenue-based systems, airlines structurally changed the economics of credit card partnerships and generated a windfall of income. Despite the success of credit card partnerships, we question whether the programs will continue producing robust growth. We’re also unsure if the improved core airline business can endure a full cycle and consistently generate returns above its cost of capital; our concerns are particularly pronounced for American and United, while we remain more bullish on Delta’s and Southwest’s passenger operations.
Danny Goode does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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