Airlines Becoming Luxury Goods

Includes: AAL, DAL, NWA, UAUA
by: TraderMark

This thesis has been bandied about a bit so it's interesting to see an analyst come out and say it - will flying become more of a midprice luxury like a Coach (NYSE:COH) bag? The answer to the validity of this is, do we return to an era of $50-$70 crude oil or are we entering a permanently higher plateau? Don't know the answer yet but of course I lean to the latter. Today we had the approval of the Northwest (NWA) / Delta (NYSE:DAL) merger as the industry further consolidates.

I can at least appreciate a bull case here, but am worried about (post global slowdown) another spike in commodity costs and how the airlines would handle that. But this analyst believes airlines could be profitable even at $115 crude by 2010... hmm. I am wondering how the credit crisis is going to affect these debt laden entities. I'm still mulling this sector with so many cross currents. Of course for now fundamentals mean nothing and these stocks trade strictly inverse to oil prices 90% of the time.

Speaking to the broader picture, this new era of higher prices will freeze out many in the country from something they took for granted: cheap rides in the air. (I never could understand how one could fly halfway across country for $89.)

  • High fuel prices are helping make airline travel a "mid-priced luxury good" and could help the carriers by prodding them into restructuring, an industry analyst says. Stifel Nicolaus & Co. analyst Hunter K. Keay said Thursday that many airlines will be profitable in 2009 and all airlines he covers will be profitable the year after, assuming oil prices of $115 per barrel by 2010.
  • Keay said that U.S. airlines prudently responded to high fuel prices by aggressively cutting capacity, dropping marginal routes, and retiring older, fuel-guzzling planes without placing big orders for new ones. The result, he said, has been better pricing power even though traffic growth as been modest or nonexistent. And there's room for growth in ancillary revenue, he said.
  • Keay said the recent decline in oil prices -- to about $105 per barrel Thursday after peaking at $147 in July -- has given airlines breathing room on the liquidity front. He also said it's unlikely capacity will return because of a lack of capital to fund new ventures, including startup airlines, and "a newfound discipline of surviving carriers."
  • "High fuel prices drive unprecedented discipline," he wrote in a note to clients. "We believe airlines are now more likely to pursue sustainable profitability at the expense of market share, unlike they have done in the past."

Another story from

  • People may complain about airlines charging fees for bags and other extras, but they are paying them anyway, to the tune of hundreds of millions of dollars annually. Combined with unprecedented capacity cuts, the new charges could help to turn the industry profitable in 2009. UAL (UAUA), for instance, says new fees will likely boost next year's revenue by $750 million. US Airways (LCC) expects a revenue gain of $400 million to $500 million.
  • US Airways President Scott Kirby said fees result not only in new revenue, but also in operational benefits. "We've seen huge improvement in baggage numbers from having 10% fewer bags go through the system," he said.
  • Baggage handling has historically been a challenge for airlines, which are expected to transfer thousands of bags between aircraft in narrow time windows at hub airports. Not only is it time consuming, but "it's where we fail the most," Kirby said. Those failures are costly, leading to re-accommodations, deliveries beyond the airport and lost bag claims.
  • So far, US Airways is the only carrier to charge for drinks -- $2 for soda, juice and bottled water and $1 for coffee. As a result of the charges, which began Aug. 1, "the cabin environment is much calmer and more efficient," Kirby said. In the past, because drinks were free, nearly every passenger had one. Now, carts no longer clog the aisles. Restroom lines have diminished. Less trash is left onboard. And it's no longer necessary to cater the aircraft every time it's on the ground.