Breaking News
Get 40% Off 0
Is NVDA a 🟢 buy or 🔴 sell? Unlock Now

Lower Airfares, Higher Profits? The Hidden Connections in the Airline Industry

By Frank HolmesStock MarketsJul 17, 2023 20:01
uk.investing.com/analysis/lower-airfares-higher-profits-the-hidden-connections-in-the-airline-industry-200584510
Lower Airfares, Higher Profits? The Hidden Connections in the Airline Industry
By Frank Holmes   |  Jul 17, 2023 20:01
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
BA
-0.34%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AIR
+0.46%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
LUV
-1.34%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DAL
-0.74%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
UAL
+0.55%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AAL
-0.72%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

For those of you who happened to buy a plane ticket in the past month, you may have noticed a welcome change in price. Airfare was down a good amount in June compared to the same month in 2022 (-18.9%) and compared to May (-8.1%), according to last week’s consumer price index (CPI) data. Declining jet fuel costs were the largest contributor to lower fares.

Although this benefits consumers, especially during the busy summer travel months, investors may be wondering: Will airlines generate less revenue as a result? Not so fast.

In a letter out last week, Goldman Sachs reports that there doesn’t appear to be a meaningful relationship between airfare CPI and U.S. airlines’ revenue per available seat mile (RASM). Investors, therefore, need not worry—at least not about falling ticket prices.

Check out the chart below. It compares annual percent changes in airfare and airline revenue per seat. Goldman found that there isn’t a strong link between the two, meaning that just because ticket prices are dropping, it doesn’t necessarily mean that carriers are making less money. The bank estimates that second-quarter RASM was off 3% compared to last year’s quarter, but that’s a far cry from how much fares fell during the same period.

Airfare CPI and RASM
Airfare CPI and RASM

Discrepancies Between CPI and RASM in the Airline Industry

So why the discrepancy? The Goldman report doesn’t provide many insights, but I think I can offer a couple.

For one, the Bureau of Labor Statistics (BLS), which issues the monthly CPI, and the airlines are measuring two separate things. The CPI allegedly measures the average change in prices paid by urban consumers for air travel over time (though I’ve raised questions about the methodology many times in the past). On the other hand, RASM is an airline industry metric that measures an airline’s operating earnings per seat per mile flown—its efficiency, in other words.

The bigger reason for the discrepancy, as I see it, is revenue composition. Airlines make money in many more ways than simply selling tickets. Ancillary revenues, including fees for non-ticket items like extra luggage, seat selection and onboard food, play an increasingly important role in an airline’s total revenue. Baggage fees alone generated a whopping $29 billion for carriers around the world in 2022, according to IdeaWorks.

None of these fees are captured in the airfare CPI, but they surely contribute to RASM.   

Other things the CPI appears to get wrong about airfare? It excludes business travel, even though this form of travel involves higher fares than leisure travel due to last-minute bookings, changes, cancellations and added services. The CPI also gathers ticketing data from the Department of Transportation (DOT), which includes only about 10% of tickets sold. Airlines, by comparison, have access to 100% of the data, so they have a much fuller and more accurate understanding of airfare trends.

Delta Reports Record Quarterly Earnings and Profitability

If you need additional proof that lower airfares don’t necessarily impact earnings, look no further than Delta Air Lines (NYSE:DAL). Last week, the carrier reported record earnings and profits in the June quarter on booming travel demand and cheaper fuel, and it gave investors a heads-up to expect another quarter of record revenue in September. Delta raised its 2023 full-year earnings per share (EPS) guidance to between $6 and $7, up substantially from earlier estimates of between $5 and $6 per share.

United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL), both scheduled to report next week, are also forecast to have their best quarterly EPS since 2019.

The earnings boom has helped airline stocks soar in 2023. Investor’s Business Daily (IBD) said last week that the 19 companies in its Transportation-Airline industry group have increased nearly 50% so far this year, making them the eighth-best-performing industry in 2023 among 197 that the publication tracks.

Gearing Up for Growth

Another sign that airlines are bracing for future growth is the incredible amount they’re investing in aircraft, ground equipment, facilities, technologies and other expenditures. In the U.S. alone, airlines are expected to spend nearly $25 billion this year on passenger aircraft and close to $6.5 billion on information technology (IT), which would be a record high in both cases, according to the latest report by Airlines for America (A4A).

Airlines and IT Investments
Airlines and IT Investments

In June, Boeing (NYSE:BA) delivered 60 new aircraft, its highest since March, despite lagging behind its European rival Airbus Group SE (EPA:AIR), which delivered 72 aircraft in June, for a total of 316 planes so far this year. Boeing's notable orders included 40 787 Dreamliners for the new Saudi carrier Riyadh Air, confirmed at last month’s Paris Air Show. Airbus has a substantial backlog of almost 8,000 aircraft, predominantly single-aisle jets like the A320neo and A321neo. This backlog represents about eight years of production. The manufacturer also booked orders for 902 aircraft, primarily from Air India and IndiGo (NS:INGL), accounting for over 70% of its order book.

Meanwhile, here in the U.S., Southwest Airlines (NYSE:LUV) plans a $450 million expansion at Houston’s William P. Hobby Airport, adding seven new gates operational by 2026 (six exclusively for Southwest), additional baggage carousels and restroom upgrades. This move facilitates growth in Texas, where Southwest's Dallas Love Field operations are capped at 20 gates. 

***

Disclaimer: All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (06/30/2023): Delta Air Lines Inc., United Airlines Holdings Inc., Airbus SE (OTC:EADSY), American Airlines Group Inc., Southwest Airlines Co., The Boeing Co.

Lower Airfares, Higher Profits? The Hidden Connections in the Airline Industry
 

Related Articles

Lower Airfares, Higher Profits? The Hidden Connections in the Airline Industry

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email