Dear Legacy Airlines: We Still Hate You

Before you go, we thought you'd like these...
Before you go close icon

You don't need our Motley Fool CAPS database to know that investors loathe airlines about as much as some customers do. But if you did check in at CAPS, you'd find Fools rate the entire sector just two of five stars. Only one, Germany's Lufthansa, rates four stars.

American carriers rate poorly on the whole, not just among Fools. Of the major carriers only Southwest Airlines (NYS: LUV) rated "good" in terms of total experience, according to a survey of 10,000 U.S. consumers conducted by the Temkin Group:

Carrier

Poor

OK

Good

Southwest Airlines

 

 

X

AirTran Airways

 

X

 

JetBlue Airlines

 

X

 

Alaska Airlines

 

X

 

Delta Air Lines

X

 

 

Continental Airlines

X

 

 

United Airlines

X

 

 

American Airlines

X

 

 

US Airways

X

 

 

Source: Temkin Group.

This isn't very surprising, given history. Last year, an anonymous Southwest pilot held his plane at the gate so a late passenger could fly to see his dying grandson. Management applauded the generous and no doubt costly decision as reflective of Southwest's commitment to great service.

On the other end of the spectrum, bankrupt AMR, parent of American Airlines and its smaller partner, American Eagle, disappointed many during the recently completed holiday travel season as the carrier ranked last in handling baggage during 2011. But does a reputation for delivering a below-average experience equate to poor financial performance? Usually yes, but not always:

Carrier

Revenue Growth (over prior year)

Gross Margin

Return on Capital

Southwest Airlines

29.4%

21.8%

5.1%

JetBlue Airlines

19.2%

28.6%

4.3%

Alaska Airlines

12.7%

27.2%

12.6%

Delta Air Lines

10.6%

20.1%

9.7%

United Continental

58.6%

26.7%

9.2%

AMR Corp.

8.2%

19.7%

(3.3%)

US Airways

9.6%

18.2%

6.1%

Source: S&P Capital IQ.

While Southwest has the second greatest growth, its "bags fly free" policy may be cutting into gross margin while returns on capital have declined as fuel prices continue to soar. JetBlue suffers from a similar affliction but also enjoys substantially better gross margins.

The legacy carriers are more of a mystery. US Airways (NYS: LCC) suffers from the lowest rankings among the majors, yet thin margins and comparatively anemic revenue growth haven't hurt the carrier's ability to produce an above-average return on capital.

United Continental (NYS: UAL) is equally confusing. Low ratings mattered little last year as the combined carrier produced industry-best revenue growth and top-tier gross and returns on capital.

Of them all, only Alaska Airlines (NYS: ALK) has proven to be an outperformer for investors over the past year -- a carrier customers characterize as just "OK." The message? Investors can't rely on service metrics as indicators of market outperformance or underperformance.

Obviously, there are better industries for investing your hard-earned savings. Which one to choose? How about companies that are going global? The Motley Fool recently introduced a special report titled "3 American Companies Set to Dominate the World." Find out who they and what our analysts expect when you download your copy. Be sure to do it soon -- this research is free, but only for a limited time.

At the time this article was published Fool contributorTim Beyersis a member of theMotley Fool Rule Breakersstock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim'sweb home,portfolio holdingsandFoolish writings, or connect with him onGoogle+or Twitter, where he goes by@milehighfool. You can also get his insightsdelivered directly to your RSS reader.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners