Southwest (LUV) and Alaska Airlines (ALK) reported earnings today, and both airlines continue tearing up the runways with scorching numbers.
For my investing dollars, these are probably the two front-running domestic airline stocks. But let’s see if we can determine the better value by discerning some of the most important metrics.
Excluding special items, LUV had record quarterly net income of $691 million, or $1.03 per share, marking its ninth straight quarter of record profits. That’s an increase of $206 million over the same quarter last year. LUV also reported breaking a quarterly record with an operating income of $1.1 billion, boosting the operating margin to 22.5% and representing a 40% increase year-over-year.
I normally wouldn’t bother to mention this about airline stocks, but the employee profit-sharing accrual in the pension fund added a record $308 million. This is critical for airline stocks, as it places enormous value on its employees as part-and-parcel of both the company’s image and its operations.
Another metric I don’t talk much about is return on invested capital. That invested capital comes at a cost, often in the form of debt and/or equity. It’s unheard of for an airline to record ROIC of 28.2% like Southwest, and it far exceeds the company’s overall cost of capital.
Interestingly, the revenue side of the equation wasn’t that great, with operating revenues up only 2% on a 7% increase year-over-year in available seat miles. Fortunately, operating expenses fell 5.5% YOY.
When dividing revenue passenger miles by available seat miles, you get the load factor, which shows the overall efficiency of the airline in filling its seats. To that end, Southwest enjoyed a record 84.6% load factor. This is to say that is how many seats are actually filled on any given flight.
My favorite part of LUV stock is probably the balance sheet. It has $3.1 billion in cash and paid down $40 million of debt, with another $95 million to be paid off by the end of the year. Who ever heard of an airline paying down debt?
Turning up the Heat in Alaska
Alaska Airlines also had a record quarter, with net income of $230 million representing a 46% increase YOY. Adjusted earnings per share of $1.76 beat analyst expectations by 3 cents and increased 56% over the year-ago period. Gangbusters.
Pretax margins took off into orbit, launching to 25.7% compared to 18.3% last year. Again, this kind of expansion is unheard of. ALK pretax margins are at 20.9%, just shy of LUV’s 22.5%. Also, like LUV, return on invested capital came in at 22%, up from 16.1% over last year. Alaska fared better on the revenue side, increasing 5%, but like LUV, it also managed to cut expenses by 4%, or about $60 million. That is the reason for these expanding margins: increasing revenue and lowering expenses.
As with most blue-chip stocks these days, we love the net income more than non-GAAP EPS. As mentioned previously, net income rose 42% to $234 million from $165 million. You’d be fooled into thinking it was a 50% increase if you only looked at the EPS, since Alaska reduced outstanding stock by 8.5 million shares, or 6.5%.
ALK also has a stellar balance sheet for an airline, with $1.19 billion in cash and only $629 million in debt, representing a $57 million decline since Dec. 31.
Bottom Line
So which of these two fine airline stocks do you go with? We have to see how the market treats them this week, but as of Thursday, LUV is up 3%, while ALK moved down more than 3%.
Considering that both stocks are about evenly priced — ALK is arguably a slightly better value.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long LUV. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
