Delta Air Lines, Inc. (DAL), Southwest Airlines Co. (LUV): Major Airlines Continue to Flounder in May

The problem for the industry is that while “upgauging” helps keep costs in check, the beneficial effect is negated if capacity creep leads to lower unit revenues. In fact, that seems to be exactly what is happening today. Carriers are offsetting normal cost inflation through upgauging tactics, but the market is unable to absorb the additional capacity, leading to modest declines in unit revenue.

What remains to be seen is whether the airlines can drive enough cost savings through upgauging to fully offset unit revenue weakness. For the moment, lower fuel prices are providing an additional tailwind and may permit some of the carriers to continue their profit growth. Looking forward, though, airlines may need to implement additional schedule cuts to keep profits moving in the right direction.

The bottom line is the bottom line
Airlines have recently become “hot” in the stock market for the first time in many years. Don’t get burned! It’s critical to pay attention to company fundamentals, rather than day-to-day stock fluctuations. Delta Air Lines, Inc. (NYSE:DAL), which was the only major airline to post unit revenue growth last month, still looks like the strongest of the bunch. The other carriers could be setting investors up for a letdown if they continue to post declines in unit revenue, which could in turn lead to lower earnings.

The article Major Airlines Continue to Flounder in May originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and has the following options: Long Sep 2013 $33 Puts on United Continental Holdings . The Motley Fool recommends Southwest Airlines.

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