Airlines Will Profit No Matter What

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 |  Includes: AAL, BAIRY, RYAAY, UAL, UAUA, XJT
by: Jack Miller

Do you think airlines will eventually be able to make money if oil stays near current levels? The analysts I've read say it will be the demise of a lot of them. The hope for them is for oil to come down, not stay where it is.

The airlines will make profits no matter what happens to the cost of fuel.

Mesa and Express Jet (XJT) are on the edge of bankruptcy, hundreds of small jets are being grounded and even hundreds of older large jets are being grounded. If the above question had been "Do you think all airlines will make money?" then the answer would be no.

CNN and Mark Perry have each reported sales of GEO Metros on Ebay (NASDAQ:EBAY). 1995 and 1996 models of these pitiful cars are selling for 5 to 7 thousand dollars even when they have about 100,000 miles on them, the sticker price in 1996 was about $9,000. In just a few months, the cost of driving one of these vehicles 100 miles has doubled. During the same amount of time, the cost of driving an SUV 100 miles has also doubled. People are scrambling to buy Metros at double last year's price and scrambling to sell SUVs at half of last year's price. Many a company is scrambling to sell its Gulf Stream Jet while it scrambles to get the best deal on commercial flights.

Analysts have fallen into the trap of believing what the majority believes, but, as Keynes told us, in economic matters the majority is always wrong. Once everyone believes oil prices are going higher, everyone acts in ways to prevent the prices from going higher. The majority believes that we must rapidly move to alternative fuels because we are quickly running out of oil. The reality is that we have used one trillion out of more than 13 trillion barrels of oil. The majority listens to the news that major airlines will spend billions more on fuel without considering that they will only spend these billions because there is demand for high priced tickets or that companies that own small jets are in the same boat as owners of SUVs.

It is likely that GEO Metros will burn more fuel this year than ever before, because they will be purchased by drivers who travel a lot, and it is likely that the amount of fuel burned by SUVs this year will be dramatically lower than the amount of fuel burned by SUVs last year. It is also likely that small jets will see a similar huge drop in the amount of fuel burned.

As usual, the big mistake is in thinking short term. The decision of GM (NYSE:GM) to close down 4 truck factories is not one that will be reversed any time soon. Big monster trucks are on the way out. Fuel is not going to be wasted. More people will ride the bus and more people will fly together.

A day or so ago, Ryan Air (NASDAQ:RYAAY) announced surprisingly good results. Other airlines that own fuel efficient planes have announced good results. United Airlines (UAUA) grounded 100 fuel hogs recently and the price of the shares are up 8%. British Airways (OTC:BAIRY) just increased long haul flight fares by 109 pounds or about $218! Even an airline like American  (AMR) that operates 400 MD-80s is running close to break even this quarter and it will ground a number of planes. At $6,000 in fuel per hour, private long haul flights are only for the very rich.

The people staying home are mostly the leisure travelers; the ones who shop for the extra low price. The business traveler is flying long haul at prices that are approaching the prices reached in 2000. Capacity cuts are pushing up the price on many routes. Capacity cuts have been a close match to demand reductions on other routes.

In April, Continental Airlines (NYSE:CAL) enjoyed a small increase in international load factors and a small decrease in its mainline load factors (domestic flight demand fell a little while international demand continued to grow), but the real story was a 6 to 7% increase in yield! Any business that is able to increase its top line by 6 or 7% during the worst of times should do quite well when times get better.

"The turn is here" means that fuel prices will go back down some, but the turn works, even if prices just level off. Pension funds which boosted their investments in commodity contracts from $16 Billion to $250 Billion in three or four years, make money only if the price of fuel goes up. If the price levels off, there will be more than $250 Billion coming out of commodity funds and into other investments. Another 3.1 Trillion "investment" Dollars sits in money market accounts. Give the American people a shot of confidence and not millions or billions but trillions of dollars will flow into stock investments. Throw in the turn in the US dollar and we will see a flood of US share investments from over seas.

Everyone knows about the airline problems. As the problems subside, the story will be told time and time again by virtually every media outlet. It will not take much of an upturn in profits to send airline shares soaring.

Disclosure: None