US Carriers Impress Despite Costs

Despite the persistent market turmoil and surging fuel costs, the U.S. air carriers has managed to provide excellent services to their passengers. Airlines appear well placed in the backdrop of higher fares, new advertising rules and capacity cuts.

According to the report released by Airline Quality Ratings, the low cost carrier AirTran gave the best overall performance last year followed by Hawaiian Holdings Inc. ( HA - Snapshot Report ) and JetBlue Airways Corporation ( JBLU - Analyst Report ) . The performance is based on four metrics – baggage handling, on-time arrivals, bumping of passengers, and complaints filed with the Department of Transportation (DOT).

AirTran, acquired by Southwest Airlines Co. ( LUV - Analyst Report ) in May 2011, continues to lead the overall airline industry that has 15 major airlines. Hawaiian had the best on-time arrivals with an average of 92.8%, a few bumped passengers, lower customer complaints and good baggage handling.

JetBlue recorded the lowest number of bumping passengers than any other airline and fewer mishandling of baggage. JetBlue, however, had the worst performance with 73.3% of average on-time arrivals.

The second largest U.S. airline, Delta Air Lines ( DAL - Analyst Report ) , ranked sixth performance-wise followed by Southwest Airlines Co. ( LUV - Analyst Report ) and US Airways Group ( LCC - Snapshot Report ) . Delta Air Lines, which was the worst performer in 2010, managed a remarkable turnaround based on technological upgrades, strong on-time arrivals, good baggage handling, limited bumping of passengers from flights, good handling of customer complaints and well-organized systems. The company exhibited 82.3% on-time arrival performances, a key measure of airlines operation.

Southwest Airlines had fewer customer complaints despite mishandling baggage. The company is currently exploring hand-held scanners to decrease the number of mishandled bags. US Airways has the maximum customer complaints with moderate bumping of passengers and on-time arrivals but has a lower track of baggage mishandling. Alaska Air Group ( ALK - Snapshot Report ) achieved the number two position for on-time performances with fewer customer complaints.

Filed for bankruptcy protection last year, American Airlines was the worst carrier with respect to on-time performance, baggage handling, bumped passengers and customer complaints. The largest U.S. airline United Continental Holdings Inc. ( UAL - Analyst Report ) also lagged in terms of operational performance, as the merger created major woes for customers. United Continental has the highest customer complaints with respect to bumping of passengers.

The U.S. airline industry is expected to remain profitable over the next two decades given the increasing worldwide trends in air travel, good operating performance and better customer services.

Increasing demand for global air travel and a concomitant rise in fares justify our optimistic thesis on the airline industry as a whole. Further, air carriers are cutting capacities and adding novel features to their services, as well as introducing new products. These measures will fuel revenue growth and reduce non-fuel costs thereby driving future profitability.

Moreover, the carriers are focusing on fleet rightsizing. Though initially expensive, this seems to be the correct strategy to lower non-fuel costs. Air carriers are replacing their older fleet, which are no longer practical in a fuel-expensive environment, with the latest fuel-efficient aircraft.

We currently have our long-term Neutral recommendation on Delta and JetBlue with the Zacks #4 (Sell) Rank while Underperform recommendation on Southwest and United Continental with the Zacks #5 (Strong Sell) Rank.