Airline stocks got hammered during the last few months. Which stunned a few folks in this environment of highfliers.
The Big Four – American Airlines, Delta, United Continental, and Southwest – product of a series of bankruptcies and mergers, carve up amongst each other over 75% of the US market. Thus, pricing power has returned to the industry, along with higher ticket prices, a slew of fees, frustrated but helpless flyers, and fat profits.
Things have gone so well that airlines have begun adding capacity, after years of cutting routes and equipment. These new planes with too many narrow seats and too little legroom are turning into an expected capacity increase of up to 3.5% this year. And suddenly investors fret about overcapacity, interspersed with visions of price wars.
But they shouldn’t have worried: airlines can always make it up with fees.
And Barron’s has their back. Word must have spread on Thursday that Barron’s would publish over the weekend this article: Airline Stocks Could Soar Up to 50%. Because on Thursday, these beaten down airline stocks began to budge.
And beaten down they were: American Airlines down 25% year-to-date through Wednesday; Delta down 17%; United down 23% year-to-date, and 30% from its recent peak in late January; and Southwest down 28% from its January high.
Then came Thursday with the premonition of Barron’s article. Over the three trading days since, American has jumped 7.9%, Delta 5.2%, United 6.8%, and Southwest 2.7%. Barron’s put at least temporarily an end to the bloodletting. Those who got wind of the article early made a nice bundle. Here are some highlights:
Changes forced by the global financial crisis, including consolidation, cost cuts, and fee hikes, have left the industry in the best financial shape in decades. Profits are soaring because of cheaper fuel.
Consider the disconnect between profits and share performance. Jet fuel has typically been the biggest operating expense for airlines. The U.S. price has plunged 40% in a year, to a recent $1.70 a gallon. That has had a dramatic effect on industry profits.
So what is to blame for this “disconnect,” for the utter blindness of investors? Revenue per available seat mile (RASM), and the “angst” it currently engenders:
But this year, RASM is expected to decline 3.5%. Brinkmanship between Southwest and American hasn’t helped investors’ nerves. Southwest has been adding capacity in Dallas, where the two airlines have hubs at different airports. Addressing an industry meeting earlier this month, American’s chief executive, Doug Parker, warned that too much industry growth could hurt profits. Shortly afterward, both companies reported declines in unit passenger revenue, and Southwest said it would scale back growth.
Dark clouds on an otherwise rosy horizon. Who would have thought!
But investors shouldn’t have worried. Turns out, during the first quarter, the slowest period of the year, airlines extracted $1.6 billion of pesky fees from passengers who checked baggage or changed reservations, up 7.4% from a year ago, and the most for any first quarter.
Bag fees are a new thing, in terms of the greatest inventions in airline history, having started in 2008. They have proven to be pure manna. The Associated Press reported, based on data from the Bureau of Transportation Statistics, that over the past four quarters, airlines raked in $6.6 billion in fees from checking bags and changing reservations.
The fee intake rose for two reasons: because traffic was up 3.2% during the first quarter, and so more people were checking more bags and changing reservations; and because airlines jacked up the fees and, as AP put it so eloquently, “forced more passengers to pay them.”
The largest 26 US airlines combined posted $3.1 billion in profits during the quarter, according to AP, of which $1.6 billion – more than half – came from fees. And there are practically no costs associated with them.
So don’t bitch next time you have to fork over some hard-earned money for the privilege of checking your bags, though that doesn’t necessarily guarantee that they’ll get there with you, or even get there at all. Just appreciate to what extent your fees, along with your narrow seat and lack of legroom, are padding the airline’s profit margin and hopefully boosting its shares. It’s all for the common good.
And the good thing is that jet fuel prices might not rise significantly any time soon. Read… Biggest Glut in Recorded Crude-Oil History Taking Shape