Significantly for the long term, the company is locking in a low fixed-cost structure. It has a modern, economical fleet with an estimated average carrier life of just 4.6 years, and that fleet has been financed in the current interest rate environment, so the company has an efficient debt service schedule for the next several years. Even better, a recent purchase of 175 Boeing 737NGs (a transition model to the new 737 “MAX”) was transacted at an estimated 50% off the list price of $15.6 billion. The combination of lower fuel prices and lower interest expense will be a formidable competitive advantage in the coming years, especially against major European airlines with older, high-interest financed fleets that compete with Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) in the short-haul market.
Southwest
On its most recent earnings call, Southwest Airlines Co. (NYSE:LUV)’s CEO Gary Kelly quantified the impact of famously not charging fliers checked baggage fees: $1 billion. However, Kelly wasn’t referring to cost to the airline: He was estimating annual revenue gained by increased market share from customers who perceive baggage fees to be a nickel-and-dime tactic of the big carriers. Southwest employs a counterintuitive ancillary revenue strategy: Its brand presence in customers’ minds as a low-cost carrier allows it to conduct non-confrontational upsells, including its “EarlyBird” (early check-in for $12.50) and “Business Select” (business class perks) services. The 2012 Amadeus Ancillary Revenue Report, an annual trade industry survey, ranked Southwest fifth among carriers worldwide in terms of total 2011 ancillary revenue. Incidentally, Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) ranked seventh and Alaska Air Group, Inc. (NYSE:ALK) 10th.
Copa Holdings
Panama-based Copa Holdings, S.A. (NYSE:CPA), also known as Copa Airlines, has been in business for 66 years. Its overarching strategy is to be the best carrier choice for those traveling within Latin America. Copa serves 29 countries in the Americas, which, according to CEO Pedro Heilborn, is “the most complete and convenient network and option for intra-Latin America travel.” By keeping a singular focus, the company can stay on point in optimizing its operations. Copa Holdings, S.A. (NYSE:CPA) achieved a net profit margin of 14.4% in 2012, among the highest in the regional airline industry.
See how simple it is? Let’s start an airline together.
On second thought, let’s both keep our day jobs. But if you were going to get into the air carrier business, you could do worse than follow the template developed by these four airlines. For now, consider investing in one or all of this group, which lies far outside the norm in a struggling industry.
The article Secrets of Successful Airlines originally appeared on Fool.com and is written by Asit Sharma.
Fool contributor Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines.
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