Dear Legacy Airlines: We Still Hate You

You don't need our Motley Fool CAPS database to know that investors loathe airlines about as much as some customers do. But if you did check in at CAPS, you'd find Fools rate the entire sector just two of five stars. Only one, Germany's Lufthansa, rates four stars.

American carriers rate poorly on the whole, not just among Fools. Of the major carriers only Southwest Airlines (NYSE: LUV  ) rated "good" in terms of total experience, according to a survey of 10,000 U.S. consumers conducted by the Temkin Group:

Carrier	Poor	OK	Good
Southwest Airlines	�	�	X
AirTran Airways	�	X	�
JetBlue Airlines	�	X	�
Alaska Airlines	�	X	�
Delta Air Lines	X	�	�
Continental Airlines	X	�	�
United Airlines	X	�	�
American Airlines	X	�	�
US Airways	X	�	�

Source: Temkin Group.

This isn't very surprising, given history. Last year, an anonymous Southwest pilot held his plane at the gate so a late passenger could fly to see his dying grandson. Management applauded the generous and no doubt costly decision as reflective of Southwest's commitment to great service.

On the other end of the spectrum, bankrupt AMR, parent of American Airlines and its smaller partner, American Eagle, disappointed many during the recently completed holiday travel season as the carrier ranked last in handling baggage during 2011. But does a reputation for delivering a below-average experience equate to poor financial performance? Usually yes, but not always:

Carrier	Revenue Growth (over prior year)	Gross Margin	Return on Capital
Southwest Airlines	29.4%	21.8%	5.1%
JetBlue Airlines	19.2%	28.6%	4.3%
Alaska Airlines	12.7%	27.2%	12.6%
Delta Air Lines	10.6%	20.1%	9.7%
United Continental	58.6%	26.7%	9.2%
AMR Corp.	8.2%	19.7%	(3.3%)
US Airways	9.6%	18.2%	6.1%

Source: S&P Capital IQ.

While Southwest has the second greatest growth, its "bags fly free" policy may be cutting into gross margin while returns on capital have declined as fuel prices continue to soar. JetBlue suffers from a similar affliction but also enjoys substantially better gross margins.

The legacy carriers are more of a mystery. US Airways (NYSE: LCC  ) suffers from the lowest rankings among the majors, yet thin margins and comparatively anemic revenue growth haven't hurt the carrier's ability to produce an above-average return on capital.

United Continental (NYSE: UAL  ) is equally confusing. Low ratings mattered little last year as the combined carrier produced industry-best revenue growth and top-tier gross and returns on capital.

Of them all, only Alaska Airlines (NYSE: ALK  ) has proven to be an outperformer for investors over the past year -- a carrier customers characterize as just "OK." The message? Investors can't rely on service metrics as indicators of market outperformance or underperformance.

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