Hits and Misses in 2011 Airlines - Analyst Blog

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The airline industry was hit hard last year owing to persistent market turmoil and surging fuel costs despite a strong turnaround in 2010. Unfortunately, we foresee a similar scenario in 2012. Airlines are also losing money due to poor customer service, which is considered as a key growth metric.

Customer service metrics are based on number of operational measures such as baggage handling, on-time arrivals, long and excessive delays, bumping of passengers, flight cancellations and complaints filed with the Department of Transportation (DOT).

Further, we think airline traffic is also a strong evaluator for operational performance of individual carriers. Airline traffic implies one mile flown by one passenger.

Strong Movers

The top performers in terms of customer satisfaction according to the Portland-based FlightStats.com and the U.S. DOT are as follows:

Moving forward to 2012, Seattle-based Alaska Airlines, a subsidiary of Alaska Air Group Inc. ( ALK ) and the smallest among the seven major U.S. airlines, was the best-performing carrier in the U.S. Alaska Airlines exhibited top on-time arrival performances, a key measure of airlines operation, last year along with fewer flight delays and cancellations. The carrier has made good progress in terms of maintenance and safety of passengers.

The 2011 traffic for Alaska Air Group climbed 9.6% year over year on capacity (or available seat miles) growth of 6.8% and load factor (percentage of seats filled with passengers) expansion of 210 basis points. The annual traffic growth of the company is the largest among the major U.S. carriers.

Healthy operating performance at Delta Air Lines Inc. ( DAL ) last year places it in the No. 2 position in terms of customer service, which came in as a bit of a surprise. The carrier, which was the worst performer in 2010, managed a remarkable turnaround based on technological upgrades, strong on-time arrivals, good baggage handling, few excessive delays, limited bumping of passengers from flights, few canceled flights, good handling of customer complaints and well-organized systems.

About 83% of the flights across the U.S. were on-time last year, up from 78% in 2010. Delta's overall traffic dipped only 0.2% last year, with capacity growth of 0.8%, offset by decline in load factor to 82.1% from 83% in prior year. Domestic traffic fell 0.7% while international traffic grew 0.8% during 2011.

Southwest Airlines Co. ( LUV ) was ranked third in satisfying customers. The largest U.S. low-cost carrier had fewer customer complaints than any other airline, despite the mishandling of baggage. Excessive flights delay especially in the first half of 2011 made luggage handling a difficult proposition. Southwest has made efforts to improve the on-time flight arrivals in the second half, but is still struggling with baggage handling problems. The company is currently exploring hand-held scanners to decrease the number of mishandled bags.

The on-time arrival performance of Southwest dropped to 71% in 2011 from 76% in 2010. Southwest recorded a strong year-over-year traffic growth of 6.4% on a capacity increase of 4.9%. Load factor increased to 80.8% in 2011 from 79.7% in 2010.

Despite the longest and excessive delays, JetBlue Airways Corporation  ( JBLU ) holds the fourth position in delivering customer service. Unfavorable weather conditions compelled the carrier to frequently delay or cancel flights, thus making customers lousy. Other metrics including baggage handling and customer complaints was favorable.

Underperformers

Filed for bankruptcy protection in November, American Airlines was the worst carrier with respect to on-time performance, baggage handling, bumped passengers and customer complaints. American Airlines had the highest percentage of canceled flights, which is 70% more than Delta Air Lines and United Continental Holdings Inc. ( UAL ). Effective early New Year, the shares of American Airlines have de-listed from the New York Stock Exchange.

United Continental, the largest U.S. airline, also lagged in operational performance, as the merger created major woes for the customers. Though merged in October 2010, United and Continental still operates as a separate entity. The company is yet to combine their passenger services and reservation system and failed to deliver the post-merger benefits as expected by travelers.

Combined traffic dropped 1.4% year over year in 2011 at United Continental. Both domestic and international traffic declined 2.5% and 0.5%, respectively. The 100 basis point year-over-year decrease in load factor and a 0.2% decline in capacity led to the second worst performance among airlines last year.

Bottom Line

We believe that the performance of air carriers are the matter of huge concern to the travelers as they indirectly influence the latter's activities. The cancellation or delay of flights might induce travelers to miss their meetings, wedding or a funeral. Frequent mishandling of baggage is also a headwind for travelers. As a result, we believe good operating performances and customer services are a key to airline success.

Going forward, air carriers are adding new features to their services as well as introducing new products to improve customer satisfaction and experience. Carriers are going wireless with the in-flight entertainment systems such as American Airlines' Gogo "Vision" wireless video-on-demand and Delta Air Lines' "Delta Connect". Other carriers will soon launch their in-flight entertainment systems.

Besides, Delta Air Lines and United Continental are installing winglets, WiFi and flatbed seats apart from expanding Economy Comfort or Economy Plus seats to their fleet. Southwest Airlines continues to benefit from EarlyBird check-in, unaccompanied minor travel and pet fees. The company is upgrading its fleet with the new Boeing Co. ( BA ) Sky Interior and the All-New Rapid Rewards program is also contributing to revenue growth. JetBlue is poised to benefit from continued success in the Getaway Vacations Division as well as the Even More Space product.

We currently have our long-term Neutral recommendations on Delta, United Continental, Southwest and JetBlue. For the short term (1-3 months), the stocks retain the Zacks # 3 (Hold) Rank.


 
ALASKA AIR GRP ( ALK ): Free Stock Analysis Report
 
BOEING CO ( BA ): Free Stock Analysis Report
 
DELTA AIR LINES ( DAL ): Free Stock Analysis Report
 
JETBLUE AIRWAYS ( JBLU ): Free Stock Analysis Report
 
SOUTHWEST AIR ( LUV ): Free Stock Analysis Report
 
UNITED CONT HLD (UAL): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ALK , BA , DAL , JBLU , LUV

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