United Airlines (UAL -1.21%) rose by a whopping 23.7% in November, according to data from S&P Global Market Intelligence. To find the reason behind the move, you need to look no further than the U.S. presidential election. Based on the history of previous administrations, the new Trump administration is seen as one that will take a less stringent approach to merger-and-acquisition activity in the airline industry.
Why a Trump victory is good for airlines
A more accommodating approach to mergers and acquisitions will lessen the impediment to individual airlines' strategic objectives, but there is also an industrywide issue. The airline industry's history tells the story of a business that continually fails to generate a return on invested capital (RoIC) to cover its cost of capital.
While there was a significant improvement in the years leading up to the pandemic, when airlines generated enough profit to cover the cost of capital, the overarching issue is still a concern for equity investors.
One reason the airline industry has traditionally failed to generate sufficient profits is its cyclicality and how airlines behave in periods of overcapacity. In the boom years, airlines expanded routes and profitability, only to be lumbered with high fixed costs when end demand slowed. The rational reaction should be to cut route capacity, but that's not always been the case in the industry.
That's where the kind of industry consolidation that might occur under a Trump administration comes in. If airlines are allowed to merge and acquire each other, route capacity will probably be cut more, and airlines should become more profitable.
Image source: Getty Images.
Why it's good news for United Airlines
As one of the market's highest-quality and most profitable operators, United Airlines is likely to benefit from such an environment. Delta Air Lines (DAL -1.83%) and United Airlines have increased their focus on the premium traveler in recent years, and they both have highly successful co-branded credit cards and loyalty programs. As such, they have diversified their revenue streams and reduced cyclical risks in their businesses. Both are generating robust profitability in 2024.
The icing on the cake would be the industry's more disciplined approach to expanding and reducing capacity. The good news is that both airlines are seeing that right now and are reporting improving yields. The optimism could be compounded by an ongoing consolidation in the industry, and United and Delta could play a role in that process, too.
