When it comes to investing in the airline industry, United Airlines (NASDAQ: UAL) may be a better choice than its competitor, American Airlines (NASDAQ: AAL). While American Airlines is trading at a slightly lower valuation, United Airlines has been assigned a higher multiple by investors due to its superior revenue growth and stronger financial position.
1. United Airlines’ Revenue Growth
Over the past three years, United Airlines has experienced a slightly better average annual revenue growth rate of 26% compared to American Airlines’ 25%. Both airlines have seen a rise in revenues, thanks to a rebound in air travel demand. Passenger traffic and ticket yield have increased significantly, driving the growth in revenues for both companies.
Looking ahead, United Airlines is expected to continue its slightly better sales growth compared to American Airlines. According to Trefis Machine Learning analysis, both companies are projected to see low single-digit average annual growth rates, with their sales reaching around $56 billion in three years.
2. American Airlines’ Profitability
While United Airlines has shown better revenue growth, American Airlines has been more profitable. American Airlines’ reported operating margin of 9% for the last twelve months outperformed United Airlines’ margin of 5%. However, both airlines are likely to face margin pressure due to rising oil prices and increased pilot pay.
3. Risk Comparison
In terms of financial risk, United Airlines appears to be a less risky pick. United Airlines has a lower debt-to-equity ratio of 214% compared to American Airlines’ ratio of 410%. Additionally, United Airlines has a higher cash-to-assets ratio of 26% compared to American Airlines’ 18%. These indicators suggest that United Airlines has a better debt position and more cash cushion.
The Net of It All
Considering the factors discussed, United Airlines is expected to offer better returns over the next three years, primarily due to its slightly better revenue growth. While American Airlines is more profitable, the prospects for United Airlines are relatively more favorable.
It is worth noting that both stocks have equal upside potential when comparing their current valuation multiples to historical averages. American Airlines stock is currently trading at 0.2x sales, compared to its five-year average of 0.4x, while United Airlines stock is trading at 0.3x revenues, compared to its five-year average of 0.6x.
While United Airlines may outperform American Airlines in the next three years, there could be better investment opportunities available. Investors can explore the peers of American Airlines to compare metrics that matter within the airline industry.
Based on Trefis Machine Learning analysis, American Airlines is expected to deliver a return of 5% over the next three years, while United Airlines is expected to deliver a return of 10%. These returns are modest, so it is important for investors to consider other investment options that could offer better returns. Trefis offers Market Beating Portfolios that can be explored for alternative investment opportunities.
 Month-to-date and year-to-date as of 9/27/2023
 Cumulative total returns since the end of 2016
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Nasdaq, Inc.