Earnings in the Air: Southwest vs. United

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Warren Buffett has said for years that he wants anyone to talk him out of owning an airline. That, of course, was before airlines became wildly profitable and before consolidation allowed the sector to do whatever it wants to customers with a "take us or take the bus" attitude. The earnings of United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV) are strong enough to offer continued support for the group, even after the stocks were close to multiyear highs.

Continental continues with its United merger, or maybe that is the other way around. Southwest continues with its AirTran acquisition integration as well.

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Southwest Airlines Co. (LUV) appears to be getting a slightly better earnings reception of the two. Earnings were $0.33 per share on revenue of $4.4 billion, both up from estimates of $0.29 per share and $4.39 billion in revenue. Outside of the items, Southwest made $236 million in the fourth quarter. Some $228 million was put into the 2013 profit-sharing plan, up almost 90% from the prior year. Southwest's shares closed up 2.2% at $21.77 on Wednesday, and the gain is almost 2% more to $22.20 in early Thursday trading. The prior 52-week high was $21.98, and now the stock is close to challenging all-time highs.

United Continental Holdings Inc. (UAL) made $140 million, or $0.37 per share net, but operating earnings were $0.78 per share and well ahead of the $0.66 estimate. Revenue was up more than 7% to $9.33 billion, which also beat the $9.28 billion estimate. Passenger fares are up about 3% per flight mile. United Continental continues on its path to cutting some $2 billion or so in annual operating costs. Shares closed at $49.18, just two cents shy of its post-merger high. Shares were indicated positive early Thursday but later the stock was down about 2% at $48.25.

Warren Buffett's rule about not owning an airline was before they were able to consolidate to just a few carriers. Now analysts have to consider how to value these going forward, and it will not be at all close to the same five times to 10 times earnings as in the past. Southwest is valued at about 17 times expected 2014, versus about 11 times for United Continental.

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