Home' Trinidad and Tobago Guardian : September 14th 2014 Contents SBG22 INTERNATIONAL
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 14 • 2014
You just spent a small fortune on airline
tickets---and the extra charges for the
bags---for your family s vacation. All your
flights were packed with other passengers
who also paid richly for the ride.
No wonder airline profits are sky-high.
Back home now, you might ask if you can share in the airlines
good fortune by buying their stock.
The answer: maybe you can, but you missed the big pay-
off.Airlines have been among the strongest stocks so far in 2014,
easily beating broad measures such as the Standard & Poor s
500 index and the Dow Jones industrial average. Since late
2011, when speculation sprouted about a merger between Amer-
ican Airlines and US Airways, the Arca airline index has soared
186 per cent. During that time frame, Delta Air Lines Inc shares
have risen fivefold, Southwest Airlines Co shares have more
than quadrupled, and United Continental Holdings Inc has
In the same period, the S&P 500 rose 68 per cent, and the
Dow gained 48 per cent.
Most US airlines have recovered fully from the one-two
combination of record-high oil prices and the recession, which
staggered them in 2008. Profit at nine leading US airlines more
than doubled to US$3.8 billion in the first half of this year,
compared with a year earlier.
A growing US economy should encourage air travel, and
many economists expect growth of around 3.0 per cent in the
second half of this year, up from 1.1 per cent in the first half.
Still, the carriers will be hard-pressed to keep growing profits.
Delta said Wednesday that revenue for every seat flown one
mile---an important statistic in the airline business---grew 2.0
per cent in August, a slowdown from earlier this year.
Savanthi Syth, an analyst with Raymond James, said that
investors considering airlines must keep expectations in check.
"The bear case would be that the big improvements are
done, and earnings growth is going to slow," she said, noting
that it will be hard to repeat the returns of the last two years
unless the economy booms. Even so, she thinks there are still
potential gains for airline stocks.
Analysts who have seen their longtime faith in the airlines
rewarded during past two-plus years say this is no time to sell.
"If you look at airline stocks against other transports or other
industrial stocks, the valuation is still comically low," said
Hunter Keay, an analyst who tracks airline stocks for Wolfe
He says that Delta and some others still have low price-
earnings ratios. That s because investors aren t sure that the
airlines will remain profitable for the long haul, even through
"The airlines still haven t really been tested by another crisis"
such as another huge spike in fuel prices, Keay said, and until
they are, investors will naturally be sceptical.
The biggest threat to the airlines rally, besides a slump in
the economy or the broader stock market, is the fear that they
would add too many flights too soon, leading to a glut of seats
and triggering fare wars. When such concerns emerged this
summer, particularly with routes between US and Europe, the
stocks slipped. The airlines ratcheted down their plans to expand
trans-Atlantic flying by this winter, and the concern about
Mergers have left four companies---American, United, Delta
and Southwest---controlling more than 80 per cent of the
domestic market. That has led to fewer price wars and kept
airfares and revenue rising.
Michael Derchin, an analyst with CRT Capital, sees no reason
that will change. He said travelers can expect that flights will
remain nearly full, which could mean higher fares, particularly
at peak periods, and new or increased fees.
Passengers don t want to pay more, but airlines are taking
a more pro-investor stance.
Delta and American have reinstated their dividends, while
also reducing debt and contributing to pension plans. And
both are buying back shares, a move that boosts the value of
remaining shares and is popular with shareholders.
Analysts say the dividends are an important signal that airline
managements are paying more attention to profits.
"In the old days, when they made money the first thing they
would do is call Boeing or Airbus and order an airplane," Derchin
said. "Nowadays some portion of their free cash is being used
to buy back shares, pay some dividends, improve the pensions.
It s more balanced."
For passengers traveling between smaller cities and large hub
airports, the ticket may say Delta, American or United, but
they re likely flying on a regional airline whose planes are
painted in the major carrier s colours.
This arrangement helps the big airlines pack their planes
more cheaply and contributes to recent record profits.
It isn t as wonderful for the regional airlines, however. Their
profits are shrinking, costs are rising, and they re having trouble
finding enough pilots to work for the salaries they pay.
Consumers should be concerned. Fares could rise as regional
airlines are forced to raise pilots pay. Aviation experts predict
that some regional airlines may fail, which could lead to reduced
service at smaller airports.
This week, an airline industry group said that 86 commu-
nities---from former hubs such as Cleveland and Memphis to
small cities like Dickinson, North Dakota, and Hollis, Alaska---
have lost at least 10 per cent of their flights since last year.
Regional airlines say the trend will get worse this winter and
next year because of a pilot shortage.
About half of all passenger flights in the US are operated by
regional airlines. The planes don t say Republic, SkyWest or
Mesa on the side---they are painted in the colours and logos
of brands such as Delta Connection, American Eagle or United
A decade ago, many of the regionals were earning steady
profits. That began to change when several of the big airlines
went through bankruptcy and rewrote their contracts with
regional airlines to cap the small guys profit margins.
Regionals that boasted 20 per cent profit margins in the late
1990s suddenly had their margins capped at around 12 per
cent, a level some don t even reach, says Robert Mann, an air-
The most successful regional airlines are still making money,
but far less. SkyWest, which earned at least US$110 million
Continued on Page 23
Links Archive September 13th 2014 September 15th 2014 Navigation Previous Page Next Page