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US Airlines Market Cap: Is This Reasonable Or Not?

Fri Jan 18, 2002 1:23 am

I was looking at some airline stocks this morning, and it struck me how completely lopsided the sector's market caps are.

Take a look at the major carriers' RPM rank versus their market capitalization. I've included some of the smaller carriers too...

These are December RPMs:

American - 9 billion RPMs - $3.8billion market cap
United - 8.2 billion RPMs - $818million market cap
Delta - 7.1 billion RPMs - $3.5billion market cap
Northwest - 5.3 billion RPMs - $1.4billion market cap
Continental - 4.5 billion RPMs - $1.6billion market cap
Southwest - 3.5 billion RPMs - $13.5 billion market cap
US Airways - 3.0 billion RPMs - $358million market cap
America West - 1.3 billion RPMs - $126million market cap
Alaska - 990 million RPMs - $791million market cap
ATA - 685 million RPMs - $151million market cap
AirTran - 375 million RPMs - $457million market cap
Frontier - 348 million RPMs - $517million market cap
Vanguard - 94 million RPMs - $22million market cap

Look at Southwest! $13.5 billion! That's not a typo...

My question is this: Certainly United doesn't deserve a market cap parallel to that of Delta or Continental considering their cost structures. But is it really that low? Is Southwest that high?

If you were buying an airline, would you really consider Frontier and AirTran worth more than USAirways?

Is Alaska really worth twice of what US is, even though they have less than a third of the traffic that US does?

Remember that market cap is a rough estimate of what wall street values a company at - assets and debts.

Now, I know that profitability is a key here, and the airlines that are consistently profitable are rewarded and the others are punished, and that makes this argument pretty academic. But, does Southwest really warrant that kind of market cap?
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RE: US Airlines Market Cap: Is This Reasonable Or Not?

Fri Jan 18, 2002 1:38 am

Actually market cap is not the value of the assets and debt but a measure of the expectations as concerns future earnings of the company. Sometimes companies are traded below the market value of all assets minus market value of debt (happened in the airlines sector, too).
This shows you the problem of using market cap as a measure for the value of a company: It is a mixture of earnings expectations and, of course, a lot of speculation, irrational thinking and psychology.
As for your list: Well, most companies you've mentioned are deep in the red, some are not (mostly low-cost carriers, same here in Europe, by the way), now who do you believe is the shareholder's darling. Add a few analysts from well-known banks that tell you that airline A is just the best thing happening in aviation for the last 300 years, now what will happen? Shareprice goes through the ceiling, market cap likewise, but did the value of the company (whatever that value may be) really change? No way.
As I work in the M&A business, i can tell you one thing: There is no such thing as the one correct value of a company, and we don't need it either. The right price is the price that someone is willing to pay for your company, and currently there are more people willing to pay a lot for Southwest than for, say, UA. That is what counts.
I hope that helps
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RE: US Airlines Market Cap: Is This Reasonable Or Not?

Fri Jan 18, 2002 2:05 am

Also, keep in mind that UA's market cap is greatly reduced by the employees owning 55% of the company.

Before, that was viewed as an advantage. Now, this essential feature of UAL stock is viewed as a drag on the company...

If and when that 55% goes back to the public, it is a more fair comparison.

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    RE: US Airlines Market Cap: Is This Reasonable Or Not?

    Fri Jan 18, 2002 3:35 am

    Analyst preferences and "irrational psychology" aside, the market cap figures listed seem to me about right (allowing for the UA employee-ownership difference, which if factored in would still give UA a market cap under $2 billion).

    The carriers with high market caps have products that consistently deliver a revenue stream that covers costs and makes a healthy profit. They thus maintain more consistent yields and are not as vulnerable to the economic roller coaster. Mostly it's having a low cost structure, sound route system, and management willing to enforce those things--eg Southwest. In Alaska's case it's probably their high-quality product as well as the fact that they have monopolies on many routes.

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    RE: US Airlines Market Cap: Is This Reasonable Or Not?

    Fri Jan 18, 2002 7:38 am

    As you suggested, flashmeister, profitability is a crucial part of how Wall Street values a company. After all, an individual (or fund manager) putting money into a company's shares is interested in return on investment. By way of example, TWA was producing around 2 billion RPM's/year in 2000, and yet their market capitalization (in a strong stock market, to boot) was well under $100 million. The reason was obvious: TWA was continually losing money and many investors and analysts felt that bankruptcy was not a question of "if," but "when." Since common shareholders are generally left with nothing even if a company reorganizes successfully, TWA's depressed share price reflected sentiment regarding the future value of its shares.

    Similarly, investor sentiment regarding United, US Airways, and America West continue to depress their share prices. It's believed America West would have been forced to file for bankruptcy protection had they not received government loan guarantees; moreover, the terms under which the guarantees were granted will result in substantial (close to 50%) dilution of current shareholder equity. America West is also technically in default on some of its lease payments, as it will have failed to make the required payment within the grace period. US Airways just posted a pre-tax operating loss of $577 million for the quarter and a net loss of just under $2 billion for the year (including writing down the value of parked aircraft). US Airways was burning through cash at the rate of $7 million per day in the fourth quarter, but expects that to improve to a loss of "only" $3 million per day in the first quarter. Also recall that US Airways is highly leveraged. As for United...Wall Street is holding its collective breath, as the conventional wisdom held that UAL was losing $10-15 million per day in the fourth quarter.

    American, Delta, Northwest, and Continental have seen their market capitalizations hold up better because it's believed they're all reasonably well-positioned to emerge intact from the airline industry crisis. While Northwest has substantial debt, it also has a large cash cushion and, though its fleet is one of the oldest in the industry, it owns its planes. And Northwest managed to post a profit in Q3. Continental is in good shape (though it too is highly leveraged) because its cost structure is lower, its yields are improving, and it is likely to be the first network major to post a profit in 2002. Both American and Delta have a large number of unencumbered aircraft, substantial cash reserves, and cost advantages over UAL and US Airways.

    As for the market cap king, Southwest, the reasons are even more obvious today. Southwest posted a PROFIT for the 4th Quarter. Not just a profit including the government subsidy, but an operating profit. They have virtually no debt, a young fleet of mostly owned aircraft, and a cost advantage over all their competitors. They were not forced to reduce capacity and, in fact, will be adding flights in February. Southwest is well-positioned to take advantage of its competitors' weaknesses and continue to grow market share. United discontinued United Shuttle. US Airways shuttered Metrojet. Delta cut Delta Express in half. Southwest's market cap reflects investor sentiment regarding its future growth and profitability.

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