Oil prices have been trending higher which usually means bad news for airlines as fuel is one of their biggest costs. In light of generally higher prices many airlines are looking to boost revenues from additional charges or overbooking flights. On a recent trip I had with Air Canada an announcement was made right before boarding the plane that there are too many carry on luggage. Passengers were given the option to volunteeringly check in their bags or else we couldn’t get on the plane. Because of this situation the flight was delayed. United Continental Holdings (or UAL on the NYSE) is the number 3 airline in the U.S. It has reported continued profits despite the high fuel costs. The airline is adding more flights and connecting more cities. It has been adding more capacity than other airlines. Their main hubs have become relatively noncompetitive so they’ve been adding more flights to small cities which don’t have competition from low cost carriers. United has been reporting stronger financial results than competitor American Airlines. The company has also been cutting back on growth projections.
According to Bruce Tatters, an economist and founding partner of Triumph Asset Management, the airline industry is in much better shape than it was in the past and investors have not given them enough credit. He explains that “about 15-20 years ago, the top 10 airline carriers in North America only accounted for about 15% of the air volume, and now the top 4 account for 80% of all traffic. This has turned itself into a really, really good oligopoly, so they have pricing power. The interesting thing is that the airline group still trades at about 4.5X EBITDA, because people still have long memories of when they were horrible.”
There is certainly a lot of experimentation. They work with a lot of data. When they try new route it will either make sense or wont. If it doesn’t, they will try something else. With higher fuel prices some of the more marginal or experimental flights wont work as well as if fuel prices were lower. Because of so much risk associated with airlines many investors are looking elsewhere to put their money.
But one thing we know is that there is significant airline purchases of new planes. The A220 airplane is the new name for the Bombardier C-series jet. Bombardier is a Canada company which has entered into a contract with Airbus to help promote its product. Airbus has taken a large stake in Bombardier’s C-series program and has taken over marketing the jets. It is able to do it more effectively than Bombardier can. Airline stocks have a tendency to be volatile. There is also some seasonality changes between spring and summer so it’s not easy to analyze airline companies. So instead, investing indirectly through plane manufacturers such as Bombardier (BBD.B) may be a good way to gain exposure to this industry. A smaller, low cost carrier JetBlue, has chosen to order 60 Airbus A220-300 aircraft for delivery in the beginning of 2020. It also has the option to buy an additional 60 planes in 2025. As airlines look to retire their older fleet they will have to turn to aerospace companies. BBD.B stock has gone up about 75% over the last 12 months. It has dropped a little bit in recent weeks but the medium term trend is still up.