What United, Delta and Alaska Airlines’ Valuation Tells You



PE ratio

This year so far hasn’t gone well for the entire airline (IYT) industry. Almost every air carrier has registered a decline in its share price, with a few exceptions—such as United Continental (UAL), which has risen 37.8% year-to-date or YTD.

Despite this remarkable gain, shares of United Continental still trade at an attractive valuation multiple. Based on trailing-12-months earnings, United Continental has a PE multiple of 11.34x. Peers Southwest Airlines (LUV) and Spirit Airlines (SAVE) have trailing-12-month PE ratios of 13.54x and 13.56x, respectively.

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Credit Suisse’s (CS) second pick, Delta Airlines (DAL), has the second-lowest PE multiple among the top four US airlines. The stock has a PE multiple of 10.56x, which follows American Airlines’ (AAL) 8.14x. Moreover, Credit Suisse’s top pick, Alaska Air Group (ALK), has the highest PE multiple at 15.09x.

Given Wall Street’s next-12-month earnings expectations, American Airlines’, United Continental’s, Delta Air Lines’, Southwest Airlines’, Spirit Airlines’, and Alaska Airlines’ PE ratios stand at 6.93x, 9.31x, 8.86x, 11.35x, 11.26x, and 12.71x, respectively.

EV-to-EBITDA multiple

Relying entirely on PE may not always the best way to determine a company’s performance due to the multiple’s various limitations. The PE multiple doesn’t focus on long-term earnings, doesn’t reflect a company’s debt, and doesn’t reflect the quality of a company’s earnings. So it’s better to examine other valuation indicators, such as the EV-to-EBITDA (enterprise value-to-EBITDA) multiple, which accommodates the limitations of the PE ratio.

The EV-to-EBITDA ratio is considered the best multiple for comparing airline stocks. At current market prices, American Airlines, United Continental, Delta Airlines, Southwest Airlines, Spirit Airlines, and Alaska Airlines have EV-to-EBITDA multiples of 6.37x, 6.00x, 5.88x, 6.75x, 7.94x, and 7.33x, respectively.

Given Wall Street’s next 12-month EBITDA expectations, American Airlines, United Continental, Delta Air Lines, Southwest Airlines, Spirit Airlines, and Alaska Airlines have forward ratios of 5.24x, 5.22x, 5.42x, 6.23x, 5.23x, and 6.48x, respectively.


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