Famed Wall Street investor Warren Buffet once was asked about his worst investment and he quickly replied, US Airways. Apparently he was so ticked about the massive amounts of money lost, his wish was to travel back in time so he could shoot down the Wright Brothers plane in 1903!
Airlines have never been known for making a profit, namely because the high levels of competition help to keep air fares low even in the face of rising fuel costs. The idea of actually investing in an airline was laughable and considered a fool’s errand. No way, a certain loser.
Fuel prices a decade ago were $1.42 a gallon and last year that price was over $3 a gallon and since fuel is an airline’s number one budget item most airline executives acknowledged that it was time for a change, so the business model that the airlines had been using for decades changed in a dramatic fashion.
Airlines no longer were interested in protecting their “turf” in markets where they were losing money or barely making a profit. In years past, airlines would maintain a slot (between two markets) just to keep other airlines from getting it. The new business model saw airlines slashing their route map, dumping dozens of unprofitable routes thereby decreasing the number of available seats – which caused an increase in overall prices.
Airline fees of course have been the main catalyst for airlines to make a profit and they are just beginning. In a few years I look for airlines to charge us for carry-on bags and might even charge us to use the overhead compartment. The area under the seat in front of us, we will be told, is yours and anything that needs to be stored above will be at a cost. The luxury of making a seat assignment well in advance will come at a cost and the charge for changing an existing reservation will continue to increase. Think being charged for an armrest is unthinkable? Think again.
Adding insult to injury for the American traveler is that the high fuel costs have prevented new low-cost airlines from popping up. The last low cost carrier to spring forth was Sky Bus in May of 2007 and we are now in the longest period of time since the airlines were deregulated (October 1978) without a new low cost carrier initiating service. This means of course that airlines are no longer forced to compete with airlines like Sky Bus, who didn’t survive for even a year, forcing legacy carriers to match insane prices like $10 for travel.
Airlines were making money in 2013 and when the worst winter on record for U.S. airlines took place, many on Wall Street said the party was over. After all, seeing more than 80,000 flights cancelled by airlines in the U.S. would certainly translate into losses or airlines barely breaking even given the challenges of such a rough winter travel season. The first quarter numbers would certainly bear that out.
Sure about that?
Enter Delta Air Lines with their reported earnings on Wednesday that they generated $281 million in profits, exceeding Wall Street expectations once again. In the slowest travel quarter of the year and on the heels of the worst winter on record for airlines, Delta made $281 million in profits? Wow, what will the rest of the year hold?
It is not outside the realm of possibility for Delta to see another billion dollar year of profits in 2014. Just over 18 months ago Delta’s stock was trading at $9 a share and today it is over $37 and it could rise much further.
Here’s a thought; if airlines are making this kind of money when fuel prices are high how much more will they make when fuel prices retract a little or even more? The profits could be staggering! Not to mention that every airline on the planet is in a race to replace their aging, fuel-guzzling fleet with newer, more fuel efficient aircraft. When you are spending billions a year on fuel, even a 10% reduction in fuel costs can help your bottom line to explode in the best kind of way.
Say to the tune of a billion dollars…or more.
Posted April 24th, 2014 @ 4:29am