The important thing for investors to appreciate is the operating leverage involved. The concept is simple, at 74% occupancy consumers typically have more than one convenient flight available to get from point a to point b. At 80.8%, the choices become much more restrictive. Therefore, in the past year, airlines have raised the prices of almost all seats on all routes. The revenue on a particular flight might have gone from $100 times 225 seats to $110 times 240 seats or from $22,500 to $26,400. The percentage increase in passengers in this example was 6.7%, the percentage increase in the fare was 10% but the percentage increase in revenues was 17%! Even more important, the first flight might have produced only a $500 operating profit whereas the second flight might have produced a $4,000 profit or an increase of 800%. Total international revenues have increased by around 17% this year.
A reader asked me yesterday if airline success depends on declining oil prices. NO! Oil prices are high partly because demand for travel, international travel in particular, is very high. If demand for oil keeps continues to hold oil prices high, the airlines will continue to have a convenient excuse for increasing prices.
Take a look at the success of the railroads the past couple of years (our NSC and CSX positions have seen very nice gains). Higher fuel costs have been a major benefit to the rails. The cost of fuel per pound of freight moved by truck is very high relative to the cost of fuel per pound for freight moved by rail. To some extend, folks are choosing to fly because the price of gas has climbed. The fuel cost of flying an airline passenger is a small portion of the total cost.