The American regional airlines industry operates in a very
competitive market yet a monopolistic one, which ruins the sanctity of a
free-market capitalism structure. Actually, the industry has taken more of
oligopolistic traits than that of a monopolistic. U.S domestic airlines
industry is one of the very few airline industries around the world which has
no kind of government involvement in the form of ownership whatsoever. It is a
wholly privately-held consortium and ethically should hold all the principles
of a free-market system. Also, the increasing number of mergers in the airline
industry has engineered the dynamics of the industry into a completely new one.
The fore-runners of the industry include stalwarts namely;
Delta Air lines, Southwest, United-Continental, American and Us airways. The
Delta Air lines leads the market with a market share of approximately about
16.3% followed by Southwest and United with neck-to-neck competition holding
market shares of 15.7% and 15.6%. The
recently merged U.S. Airways Group Inc. and American Airlines Inc. have gained
in size and capacity by creating the largest global carrier. Despite the merged entity having more
pricing power and control over a larger number of slots, we believe it will
have little effect on the dynamics of the U.S. aviation industry as 80% of the
same market will be dominated by the American airlines, United-Continental,
Delta and Southwest.
The biggest impediment in the road to profitable future is
the rising fuel costs. However, there are other factors such as environmental
regulations, infrastructure, market liberalization, airplane capabilities,
other modes of transport and emerging markets that impact the position of
airlines in the industry. For this very reason, airlines have taken concrete
steps to increase the level of their profitability. Delta air lines Inc. has
decided to replace its old 50-seater inefficient aircrafts with new streamlined
Boeing aircrafts. Moreover, in order to keep up the pace with the growing needs
of the consumer for comfort and luxury, Delta Air Lines Inc. plans to redesign
their existing aircrafts accordingly. On the other hand, United-Continental
holding is also planning on revamping the interior and renovating the whole
interior design into a more comfortable and luxurious set-up. This trend has
ignited even more fierce competition in the industry but restricted to the top
four companies only. The bottom part of the list remains aloof from these
developments. However, until recently, emergence of smaller airlines has been
quite the talk of the town. Spirit Airlines Inc. is one of the few that have
created a stir as it plans to double its fleet size by 2017.
Despite Delta airlines announcing quarterly dividends of 0.06
USD per share, the investor’s confidence in the share remains relatively low as
the P/E ratio remains well below the industry average. The nature of
investments is risky as denoted by a relatively higher beta but a satisfactory
score on the earnings section overcomes it. All-in-all the stocks offer a high
level of financial leverage because of the investments being financed by debts
as shown by the debt to equity ratio of 94.87. However, despite a strong market
share United-Continental holdings have faced weakening revenues resulting in
lower profits. Investors have been hesitant to buy the stocks as the earnings
have declined sharply in the first quarter resulting in quarterly losses.
Consequently, the share prices are cruising downwards. The debt to equity ratio
is at a staggering figure of 470, which 5 times the industry average. The
company seems to be facing ailing situation due to increased burden of the
debts and might soon lose its competiveness to small emerging airlines.
Likewise, American Airlines
have also been reporting losses in the first quarter of the year. The two
recently merged companies are apparently observing the after-shocks of a merger
reflected in their poor performance in the stock markets.
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