The markets must be optimistic about both consumer and business spending, as well as the ongoing drop in oil prices. The stocks of almost every major airline reached 52-week highs in the past several days. As a long period of industry mergers draws to a close with the U.S. Airways Group Inc. (NYSE: LCC) marriage with American Airlines, there is a widely held perception that a good economy, plus the economies of scale that go with consolidation, have given airlines a semi-permanent earnings edge.
Source: courtesy Airbus S.A.
The most notable thing about the stock peaks is that both regional carriers and large international carriers have done well. Perhaps the fact that an airline the size of Delta Air Lines Inc. (NYSE: DAL) has succeeded does not hurt the chances of Southwest Airlines Co. (NYSE: LUV) or Alaska Air Group Inc. (NYSE: ALK) doing well simultaneously. After years of debate about whether large carriers could run smaller ones out of the market because of huge route systems, or small carriers could cherry pick the best markets, the impression that each part of the industry can coexist profitably has become more acceptable.
Regardless how the debate about small versus large carriers sits with investors, one thing is clear. The huge price of jet fuel that plagued the industry off and on since 2008 has become less of a damaging factor to bottom lines. Part of the sea change is due to novel practices, like Delta’s purchase of refining capacity. More important, crude has dropped below $100 a barrel and appears likely to remain there for now.
The other advantage airlines have picked up is that the flying public continues to board planes in increasing numbers, as the airlines provide fewer and fewer seats. Capacity management has improved, in part because of mergers. Perhaps just as important, the long lists for fees that run from baggage fees to expensive snacks have not hurt demand. And taking a bus to most destinations is not an alternative option.
The airline recovery is on, and most current trends favor long-term prosperity.
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