On the Runway, Ready for Takeoff
By JONATHAN R. LAING | MORE ARTICLES BY AUTHOR
After years of consolidation, the airline industry is poised to become a comfortable oligopoly. The biggest beneficiary will likely be United Continental.
All of this cost United dearly in terms of passenger revenues and profitability. Year-over-year growth in the all-important passenger revenue per available seat mile rose only 5.2%, compared with 14% for Delta Air Lines (DAL) and 8.2% for US Airways Group (LCC).
Yet the impact on United's stock was muted following the April 26 earnings report. The shares, which closed Friday at $22.28, are down just 3% since the news, as Wall Street analysts were looking for a bigger first-quarter loss before special items. Also United is now trading at just 5.8 times the $3.86 a share in earnings that analysts are forecasting for this year and four times next year's projections of $5.52. Most analysts have circumspect price targets for the stock of about $26, though Sterne Agee analyst Jeff Kauffman, who foresees a sea change in airline profitability afoot because of industry consolidation, has an 18-month price target of $38.
United has lots of potential despite its recent travails, due to its enviable route structure and global reach. It boasts strong and strategically located U.S. hubs in Chicago's O'Hare Airport, Houston, New York/Newark, Denver, San Francisco and Washington, D.C.'s Dulles Airport. Moreover, United is a charter member of the Star Alliance, a formidable collection of cooperating international carriers including Lufthansa, Singapore Air, Air Canada, Japan's ANA and Air China. This ensures that United can offer a seamless travel experience for high-yielding business customers despite relentlessly growing competition in the U.S. from Southwest Airlines (LUV) and Spirit, and overseas from carriers such as Cathay Pacific, a member of Delta's Sky Team Alliance.
To be sure, a stock investment in United isn't w