michael707767
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Part One
MONDAY, NOVEMBER 27, 2006
BARRON'S EDITORIAL COMMENTARY
Shrinking the Skies
There are too many domestic airlines, but a merger is not the answer
By THOMAS G. DONLAN
EVERY AMERICAN DID NOT TRAVEL by air last week -- it just seemed that way. Flights were full, ground services, including the Transportation Security Administration, were overwhelmed. Passengers may be forgiven for wondering how the U.S. aviation industry can make so little money providing a service that everyone wants.
Two of the biggest air carriers, Delta Air Lines and Northwest Airlines, are in bankruptcy. Some of the others, including United Airlines and US Airways, have recently emerged, or like American Airlines, barely avoided that fate with a reorganization that mirrored what would have been done in bankruptcy court.
Every major airline except American and Southwest has been there at least once in the past 20 years, not to mention all the once-famous and never-famous names that no longer exist.
Domestic airline investors have been hammered repeatedly, although speculators have had chances to do very well.
Anyone with a suspicion that American Airlines' parent corporation AMR would avoid bankruptcy at its moment of crisis in 2004 could have ridden a one-dollar stock all the way to a recent level around 30.
Don't call that easy money -- it would have taken real courage to make the bet, especially to leverage the bet. But fortunes have been made as well as lost on airline stocks, even though the industry has made no net profit since the Wright Brothers.
Cheap at Twice the Price?
As Andrew Bary outlined in Barron's Oct. 2 cover story, most airline stocks are still cheap. The exceptions are those in bankruptcy, where the bondholders will get new stock and the old stockholders are likely to get nothing.
The solvent carriers mostly sell for less than 10 times projected 2007 earnings. That would be a warranted multiple if jet-fuel prices hold steady and the economy tumbles. Any improvement in fuel prices would be a positive and mere avoidance of disaster should push airlines further into friendly skies.
But friendly skies for airlines are full of clouds for passengers. The past few years of financial woes have constrained growth, and that's been the real source of domestic aviation's recent return to modest prosperity.
Even in October, not a wildly popular month for air travel, the 11 carriers with independent national route systems filled more than 70% of their available seats. For the third quarter, indeed for the year through September, most of them filled more than 80% of their seats. Official results aren't in, but we suspect Thanksgiving-week travelers rarely saw an empty seat.
We may be at a turning point in the domestic aviation market. Unprofitable airlines keep flying the equipment they have, and even ground those that cost a lot to fly. Capacity shrinks, middle seats fill up. Competition among 11 carriers keeps prices in check. There's nothing left to give, except comfort.
U.S. airlines have only 140 airplanes scheduled for delivery next year, and most will replace aircraft in the domestic fleet, which numbers 5,000.
That will change in a couple of years. Profitable airlines purchase new aircraft, almost by reflex. If past results are indicative of future returns, U.S. airlines will order hundreds of planes while they are prospering, and receive them during the next economic downturn. Then the cycle will begin again.
MONDAY, NOVEMBER 27, 2006
Shrinking the Skies
There are too many domestic airlines, but a merger is not the answer
By THOMAS G. DONLAN
EVERY AMERICAN DID NOT TRAVEL by air last week -- it just seemed that way. Flights were full, ground services, including the Transportation Security Administration, were overwhelmed. Passengers may be forgiven for wondering how the U.S. aviation industry can make so little money providing a service that everyone wants.
Two of the biggest air carriers, Delta Air Lines and Northwest Airlines, are in bankruptcy. Some of the others, including United Airlines and US Airways, have recently emerged, or like American Airlines, barely avoided that fate with a reorganization that mirrored what would have been done in bankruptcy court.
Every major airline except American and Southwest has been there at least once in the past 20 years, not to mention all the once-famous and never-famous names that no longer exist.
Domestic airline investors have been hammered repeatedly, although speculators have had chances to do very well.
Anyone with a suspicion that American Airlines' parent corporation AMR would avoid bankruptcy at its moment of crisis in 2004 could have ridden a one-dollar stock all the way to a recent level around 30.
Don't call that easy money -- it would have taken real courage to make the bet, especially to leverage the bet. But fortunes have been made as well as lost on airline stocks, even though the industry has made no net profit since the Wright Brothers.
Cheap at Twice the Price?
As Andrew Bary outlined in Barron's Oct. 2 cover story, most airline stocks are still cheap. The exceptions are those in bankruptcy, where the bondholders will get new stock and the old stockholders are likely to get nothing.
The solvent carriers mostly sell for less than 10 times projected 2007 earnings. That would be a warranted multiple if jet-fuel prices hold steady and the economy tumbles. Any improvement in fuel prices would be a positive and mere avoidance of disaster should push airlines further into friendly skies.
But friendly skies for airlines are full of clouds for passengers. The past few years of financial woes have constrained growth, and that's been the real source of domestic aviation's recent return to modest prosperity.
Even in October, not a wildly popular month for air travel, the 11 carriers with independent national route systems filled more than 70% of their available seats. For the third quarter, indeed for the year through September, most of them filled more than 80% of their seats. Official results aren't in, but we suspect Thanksgiving-week travelers rarely saw an empty seat.
We may be at a turning point in the domestic aviation market. Unprofitable airlines keep flying the equipment they have, and even ground those that cost a lot to fly. Capacity shrinks, middle seats fill up. Competition among 11 carriers keeps prices in check. There's nothing left to give, except comfort.
U.S. airlines have only 140 airplanes scheduled for delivery next year, and most will replace aircraft in the domestic fleet, which numbers 5,000.
That will change in a couple of years. Profitable airlines purchase new aircraft, almost by reflex. If past results are indicative of future returns, U.S. airlines will order hundreds of planes while they are prospering, and receive them during the next economic downturn. Then the cycle will begin again.
