Click here to see the airlines charging the most and least in fees

In order to stay profitable in the current market, many airlines have raised or added fees in the past several years. Airfarewatchdog.com surveyed the fees of 14 major domestic airlines charge, finding 14 different extra charges. Some fees — such as charging for changing a flight, for checked bags, and even for blankets and pillows — have been met with outrage by travelers. 24/7 Wall St. reviewed Airfarewatchdog.com’s survey to identify the air carriers with the worst fees and ranked all the carriers, best to worst.

These days, U.S. carriers operate in a hyper-competitive market. Travel sites such as Travelocity, Orbitz, and Kayak have forced U.S. Air, American Airlines, and United to lower their fares. In fact, the fares have gone down so much that the carriers are losing money on many of their flights.

In an interview with 24/7 Wall St., Airfarewatchdog.com founder George Hobica explained that it is the sustained pressure on airlines to keep their fares low that has caused their declining profitability and forced them to levy increased fees. Adjusted for inflation, he explained, airfares are lower today than they were 20 years ago. Even with the extra fees, he added, the amount of money per passenger the airlines make remains well below what they made more than a decade ago.

The airlines with the greatest financial difficulties also tend to charge higher fees in order to help them stay afloat. American Airlines, which has by our calculation the highest fees, lost more than $1.1 billion in operating revenue in 2011, leading up to its second bankruptcy. The airlines that charge the lowest fees, like Southwest, and Alaska, remain profitable.

The main difference between Airlines such as Southwest and Alaska are able to remain profitable and consequently charge lower fees, while others such as U.S. Air, United, and American cannot is age, said Hobica. The low-fee airlines are younger, with younger fleets, which cost less money to maintain. Also, they have younger employees who do not need to be paid as much as legacy employees at older airlines. This is one of the key reasons, Hobica explained, “U.S. airlines are behind the eight-ball: they have labor rules [and] they can’t fire these people.”

A review of the airlines with the highest fees shows that most had among the worst customer service ratings. American and United, which had among the five-highest fees, also had the worst customer service rating from the American Customer Satisfaction Index. Southwest, which had among the lowest fees, scored as one of the best on the ACSI.

Hobica explained this makes sense considering the history of these larger, older airlines. “Some of the newer airlines, like JetBlue and Virgin America — their employees have not been battered as much as some of the mainline carriers like American, United, and Delta. A lot of these employees lost their pensions and have been mistreated by the management, and so they’re more jaded,” he said.

Using Airfarewatchdog.com’s report on the type of fees each of the 14 major U.S. domestic carriers charges, 24/7 Wall St. totaled the amount a passenger would pay if he or she paid at least the minimum fee in each of the 14 fee categories. These categories include fees for additional checked bags, overweight bags, food and drink, flight change fees, and booking fees. In addition to the fee data from Airfarewatchdog.com, we considered airline operating profit and revenue, as collected by the Bureau of Transportation Statistics. We also reviewed customer satisfaction scores for many of these airlines, which we obtained from the American Customer Satisfaction Index.

The latest airline to make it more difficult and more costly for travelers to book through the travel sites is Frontier Airlines, which is owned by Republic Airways Holdings Inc. (NASDAQ: RJET). JetBlue Airways Corp. (NASDAQ: JBLU), Spirit Airlines Inc. (NASDAQ: SAVE) and Virgin America also provide incentives for customers to book flights directly from the airlines’ websites. Southwest Airlines Co. (NYSE: LUV) has never allowed booking through travel websites, and American Airlines got into a dispute with Orbitz in 2010 during which the airlines temporarily refused to allow Orbitz to display pricing information for flights.

According to the Associated Press, Frontier will try to induce customers to book directly by allowing them to choose their seats (something they can no longer do when booking on a travel website) and by cutting frequent flyer miles in half for those customers who use a travel site. Change fees will also be increased by $50 for customers using the travel sites.

Frontier claims it costs the airline $55 to $60 million a year for commissions to travel sites, and that in the first half of the year the airline derived 42% of its $723 million in revenue from booking its own flights. The airline wants to raise that percentage to 65%.

The denial of booking services combined with reductions in the number of flights available could be a real drag on revenue at the travel websites. Shares of all the travel sites took a dive in early August on weak quarterly results from Priceline and Orbitz. Most have recovered somewhat since then, but Orbitz has continued to plunge to levels not seen since last November. And in an uncertain economy, the travel sites could be hit even more.

Paul Ausick

Even after a huge drop of nearly 15% to $578 and some change on the stock price after poor sales and lower guidance, Priceline’s market capitalization rate is still $28.8 billion. If you know anything about airline stocks, you know that the market refuses to value them highly. When their earnings multiples are so low like they are now (4 to 6 times earnings in many cases), all investors have to do is remember how bad these perform in recessions and when fuel prices go through the roof.

So back to the valuation conundrum. Priceline is becoming more and more of an international travel destination giant. It may be hard to refer Priceline just to the U.S. carriers, but many individuals still only think of Priceline as a domestic air bidding destination.

So we tallied up the valuations of the major U.S. carriers. This includes Southwest Airlines Co. (NYSE: LUV), Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), US Airways Group Inc. (NYSE: LCC), JetBlue Airways Corp. (NASDAQ: JBLU), Spirit Airlines Inc. (NASDAQ: SAVE) and SkyWest Inc. (NASDAQ: SKYW). Of course the valuation of AMR is up for grabs, considering that it is in bankruptcy and may be acquired by Delta or US Air.

In fairness, Priceline now has more than 165,000 hotels in its arsenal, it also offers deals on cruises, cars and vacation packages. Still, what do you think when you have airlines trading at earnings multiples on the floor and the booking agency trading at almost 20-times expected earnings?

So far we have seen analyst downgrades from the likes of BofA/Merrill Lynch and Stifel Nicolaus.

Here is a table showing the combined market valuations of the U.S. air carrier sector, minus the wild card of AMR that is …

JON C. OGG

Take a look at Delta Air Lines Inc. (NYSE: DAL) with a 10% drop to $10.31 versus a 52-week range of $6.41 to $12.25.  The company posted weaker than expected travel trends in its load factor.  Another issue is that its hedging efforts were thwarted because falling oil prices means that the airline is suddenly locked in on fuel price at above-market prices. The company’s fuel price per gallon was $3.37 for the month of May and its system load factor increased 0.2 points on a 0.9 percent cut in capacity. Its domestic load factor was only 85.4%.

The news is honestly a bit of a head-scratcher. If you fly very often in major markets, the planes are generally packed and the airports sure look full. Maybe passing on all those baggage costs and nickel-and-diming the passengers to death is back-firing.

United Continental Holdings, Inc. (NYSE: UAL) followed Delta shares lower on the thought that woes at Delta are the same at United Continental.  Shares are down 6.5% at $22.77 on the day. Ditto for US Airways Group, Inc. (NYSE: LCC) with a 10% drop to $11.38.

Southwest Airlines Co. (NYSE: LUV) is generally considered the best-run airline that there is, but it also has been an active hedger of fuel prices.  Its shares were down the least compared to the majors with a drop of 2.7% to $8.70.

JetBlue Airways Corporation (NASDAQ: JBLU) is also lower by 2.7% and the positive news of its airport expansion plan at JFK airport in New York from last week is likely supporting the stock.

Even the fairly new shares of Spirit Airlines, Inc. (NASDAQ: SAVE) are getting to share in the pain with a drop of 6% to $17.74 on the sector weakness.

Crude oil was down earlier today, but the latest WTI crude oil was up almost $1.00 per barrel at $84.10 on last look.

JON C. OGG

Walmart Sued over Bribery Scandal

The California State Teachers Retirement System (CalSTRS) sued Walmart (NYSE: WMT) because the world’s largest retailer may have violated Mexican and U.S. laws. At issue is the alleged bribery scandal at Walmart’s Mexico operations. “By utilizing the derivative action, CalSTRS is seeking to remedy the damages sustained by Wal-Mart as a result of alleged gross misconduct by Wal-Mart’s executive officers and directors,” CalSTRS Chief Executive Officer Jack Ehnes said in the statement. The trouble with the suit may be that nothing has been proven about Walmart’s conduct in Mexico. The New York Times made a very compelling report about the behavior of senior management in light of events in Mexico. It could be some time before the paper’s story is completely vetted. Nonetheless, the CalSTRS action will open the door to more suits by institutional investors, and maybe individual ones. Walmart’s legal costs will rise even more than they would have just to be involved in internal investigations, as well as those that will be made by the U.S. and Mexican governments.

Spirit Airlines Under Scrutiny

One of the favorite business stories in the press this week concerns a Spirit Airlines (NASDAQ: SAVE) plan to charge as much as $100 for big carry on bags. The airline sets its ticket prices so low that large fees are its only means to make money. It has taken the industry strategy to charge for baggage, meals, headsets and WiFi to a new level. Spirit management shrugged off suggestions. In essence, they said, Spirit is still one of the most inexpensive airlines. And it does fly planes with seats, engines and pilots. In light of those things, the complaints are overblown.

Whither Gasoline Prices?

Gasoline prices have stopped falling, at least for a day. The AAA Fuel Gauge report showed the cost for a gallon of regular based on the national average was $3.802. That is statically flat with $3.803 the day before. The price is down from $3.826 a week ago and $3.928 a month ago when it was assumed the price almost certainly would top $4 this summer. Recent data show that the U.S. economy continues to be in a period of modest growth. The Iran sanctions crisis was supposed to have gone away. But famous economist Nouriel Roubini said there likely would be a clash among Iran, Israel, and the U.S. after the American elections. That, he forecasts, will cause a huge rise in oil prices, and the price of oil derivatives like gasoline. Then the world may be thrown into a period of deep depression lasting years. Or, perhaps there will be no war, the economies of Europe will fall more deeply into recession, the GDP growth of China will slow and gas prices will drop toward $3.50.

Douglas A. McIntyre

Here is a link to each summary with much more detail from the wire:

Ares Secondary (ARCC) hits shares
Spirit Airlines (SAVE) insiders unloading stock
A123 (AONE) has a direct share sale
Sequenom (SQNM) needs capital
Boardwalk Pipeline (BWP) Raising Capital
Hercules (HTGC) raising new investment capital
Martin Midstream Partners (MMLP) buying analyst coverage
ZIOPHARM (ZIOP) raising cash
Francesca’s (FRAN) shares held up
Nordic American Tankers (NAT) sells shares for more boat buying

What is funny is that this list is ten companies and it still leaves a few fresh filings out.

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JON C. OGG

With American Airlines on the sidelines, we’ve looked at the stocks of several other US carriers in a search for some hidden value: Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), US Airways Group Inc. (NYSE: LCC), JetBlue Airways Corp. (NYSE: LCC), Alaska Air Group Inc. (NYSE: ALK), Hawaiian Holdings Inc. (NASDAQ: HA), and Spirit Airlines Inc. (NASDAQ: SAVE).

Delta Air Lines has a median target price of $18.00 and is trading at $8.39 around noon today. The implied gain here is about 115%. Delta’s share price is about -1.5% lower than it was on October 21st, so the implied gain is growing because the share price is falling. The target price is unchanged since October.

US Airways has a median target price of $10.00 and is trading today at $5.36, about -7.6% lower than the share price in late October. The implied gain is about 86.6%, and the target price is unchanged since October.

United Airlines has a median target price of $32.50 and is trading today at $19.94, yielding a potential upside of nearly 63%. The stock’s target price rose by $0.50 in the past six weeks, but the share price has fallen by about -1.4% in the same period.

Every one of the nine stocks we looked at has an implied gain of greater than 20%, proving once again that numbers often don’t tell the whole story. The only stock with a chance of offering investors some value is Alaska Air. But the chance is a very slim one.

Alaska Air’s median target price was raised from $80.00 to $83.00, and the share price has increased by about 5% since late October. It’s the only one of these nine to perform that combined feat. The stock’s potential upside is 22% and its forward P/E is 7.39. The company does not pay a dividend.

Alaska has ordered 15 new 737s from Boeing Co. (NYSE: BA) and deliveries are scheduled to begin in 2012. Thirteen of the new planes will be 737-900ERs, which carry a list price of $89.6 million each. That’s a total of about $1.2 billion, which is roughly equal to both the company’s long-term debt and to its available cash.

The company does not indicate how it will finance the purchase of these planes, but a recent report in the Financial Times indicates that European banks, the main lenders to global airlines, have cut back lending for commercial aircraft purchases. That means the airlines will have to issue debt or perhaps resort to leasing new planes.

The impact on aircraft makers like Boeing is likely to be greater than the impact on airlines, but what’s reasonably certain is that the cost of capital for aircraft is going to rise. For that reason, if for no other, investing in any airline stock now is a speculative play rather than a value play.

Paul Ausick

There appear to be some value plays in the industry right now, but whether that is true or whether we’re looking at value traps depends to forces beyond the industry’s control. Fuel costs and the overall US and global economies being the most critical.

All data from Yahoo! Finance and MarketWatch and current stock prices were gather just before noon today.

AMR Corp. (NYSE: AMR), parent of American Airlines, has a median target price of $4.75 from 10 brokers. Shortly before noon today, shares are trading today at $2.77, for an implied gain of $1.98, or 71%. AMR’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $2.73-$8.98, and at today’s price that’s about 1.5% above its 52-week low, posted earlier this morning, and 69% below the 52-week high. AMR reported a loss of $162 million for the third quarter, mainly due to a 40% rise in fuel costs that more than wiped out fare and fee increases. Rumors of a Chapter 11 bankruptcy filing have also hit AMR’s share price hard.

Delta Air Lines Inc. (NYSE: DAL) has a median target price of $14 from 13 brokers. Shortly before noon today, shares are trading today at $8.52, for an implied gain of $5.48, or 64%. Delta’s forward P/E is 4.15 and the company does not pay a dividend. The stock’s 52-week trading range is $6.41-$14.54, and at today’s price that’s about 33% above its 52-week low, posted earlier this morning, and 41% below the 52-week high. Delta reports earnings next week, and the consensus estimate is EPS of $0.93 on revenue of $9.73 billion. The company has already announced a fare increase for the coming months of up to $10 per ticket, its 17th fare hike this year.

United Continental Holdings, Inc. (NYSE: UAL), parent of both United and Continental airlines, has a median target price of $32 from 13 brokers. Shortly before noon today, shares are trading today at $20.23, for an implied gain of $11.77, or 58%. UAL’s forward P/E is 3.95 and the company does not pay a dividend. The stock’s 52-week trading range is $15.92-$29.75, and at today’s price that’s about 27% above its 52-week low, posted earlier this morning, and 32% below the 52-week high. UAL has followed Delta’s recent fare hike and will also report earnings next week. UAL is expected to post EPS of $2.08 on revenue of $10.14 billion.

Southwest Airlines Co. (NYSE: LUV) has a median target price of $12 from 14 brokers. Shortly before noon today, shares are trading today at $8.70, for an implied gain of $3.30, or 38%. Southwest’s forward P/E is 11.35 and the company does not pay a dividend. The stock’s 52-week trading range is $7.15-$14.32, and at today’s price that’s about 22% above its 52-week low, posted earlier this morning, and 39% below the 52-week high. Southwest reported earnings this week that were hammered by non-performing hedges. The company took a non-cash writedown of $262 million, mostly attributable to hedging.

US Airways Group Inc. (NYSE: LCC) has a median target price of $10 from 12 brokers. Shortly before noon today, shares are trading today at $5.80, for an implied gain of $4.20, or 72%. US Air’s forward P/E is 3.96 and the company does not pay a dividend. The stock’s 52-week trading range is $4.53-$12.26, and at today’s price that’s about 28% above its 52-week low, posted earlier this morning, and 53% below the 52-week high. US Air is expected to report EPS next week of $0.49 on revenue of $3.43 billion. The company expects to offset the rise in fuel prices cutting its capacity and stronger demand.

JetBlue Airways Corp. (NASDAQ: JBLU) has a median target price of $7 from 13 brokers. Shortly before noon today, shares are trading today at $4.26, for an implied gain of $2.74, or 64%. JetBlue’s forward P/E is 8.52 and the company does not pay a dividend. The stock’s 52-week trading range is $3.49-$7.60, and at today’s price that’s about 22% above its 52-week low, posted earlier this morning, and 44% below the 52-week high. JetBlue’s CFO left the company this week, prompting speculation about his reasons for doing so. CFO departures always cause headaches — and falling stock prices — particularly when there is no solid information. JetBlue is expected to report EPS next week of $0.13 on revenue of $1.2 billion.

Alaska Air Group Inc. (NYSE: ALK) has a median target price of $80.50 from 12 brokers. Shortly before noon today, shares are trading today at $64.68, for an implied gain of $15.82, or 24%. Alaska Air’s forward P/E is 7.25 and the company does not pay a dividend. The stock’s 52-week trading range is $48.14-$70.61, and at today’s price that’s about 34% above its 52-week low, posted earlier this morning, and 8% below the 52-week high. Alaska Air fell victim to the same non-performing hedge fiasco that hit Southwest and cost the company more than $77 million. The company’s revenue increase more than made up for the rise in fuel costs, but hedging sunk the ship.

Hawaiian Holdings Inc. (NASDAQ: HA), parent of Hawaiian Air, has a median target price of $8 from 5 brokers. Shortly before noon today, shares are trading today at $5.25, for an implied gain of $2.75, or 52%.Hawaiian Air’s forward P/E is 6.27 and the company does not pay a dividend. The stock’s 52-week trading range is $3.67-$8.69, and at today’s price that’s about 43% above its 52-week low, posted earlier this morning, and 40% below the 52-week high. Hawaiian Air beat EPS expectations by more than 30% in its most recent quarter and is expected to post EPS of $0.20 on revenue of $421 million for the current quarter ending in December. The company handles more than 85% of Hawaii’s intra-state traffic.

Spirit Airlines Inc. (NASDAQ: SAVE) has a median target price of $18.58 from 8 brokers. Shortly before noon today, shares are trading today at $13.86, for an implied gain of $4.72, or 34%.Spirit’s forward P/E is 8.14 and the company does not pay a dividend. The stock’s 52-week trading range is $10.18-$16.27, and at today’s price that’s about 36% above its 52-week low, posted earlier this morning, and 15% below the 52-week high. Spirit makes up for ultra-low fares with a plethora of fees. The company reports earnings next week and is expected to post EPS of $0.29 on revenue of $275 million.

So, what happens when you see “Value stocks” where analysts have seen the prices of their companies sink and where the overall price targets imply upside of 40%, 50%, or even over 60% being the “norm” in the consensus?  It is a classic signal that the value stocks might actually be “value traps” where investors think they are buying something cheap but where there are problems lurking.   It happens all the time.  Still, these numbers are fairly hard to ignore.

The IATA reported that passenger traffic rose 4.5% in August compared with August 2010, but that growth was considerably slower than the 6% year-over-year growth shown in July.  Freight traffic dropped -3.8% in August compared with August 2010. When August 2011 traffic is compared with July 2011 traffic, the passenger market fell by -1.6% and the cargo market fell by -1.3%.

At virtually the same time, an airlines industry analyst at Citi lowered his rating on US Airways Group Inc. (NYSE: LCC) from ‘hold’ to ‘sell’ and downgraded United Continental Holdings Inc. (NYSE: UAL) from ‘buy’ to ‘hold’. The downgrades were the result of lowered estimates of global GDP growth, continuing high levels of unemployment, and eroding consumer confidence.

There is something of a disconnect between the IATA report and the ratings changes by Citi. The Citi analyst recommended buying discount carriers such as Southwest Airlines Co. (NYSE: LUV), Alaska Air Group, Inc. (NYSE: ALK), and Spirit Airlines, Inc. (NASDAQ: SAVE). All these offer cheaper flights, of course, but they are also primarily US  domestic carriers, a group that the IATA says is a “source of weakness.”

US domestic passenger travel fell by -0.3% year-over-year in August. If the discount carriers are a better investment, it is only because they are being compared to higher-priced carriers who are likely to feel the pinch of fewer passengers sooner. But the low-priced airlines are also likely to have trouble attracting passengers as more people decide to stay close to home.

In the freight market, weakness in air freight shipments “represented a loss of market share to other transport modes,” according to the IATA. Maybe, but the container shipping business has not been exactly booming either recently.

Railroads, however, have been moving more freight, including intermodal (containers and trailers) freight. Intermodal volume was up 3% in the week ending September 24th, compared with the same week a year ago. That was the highest weekly gain in four years. Traffic in the western states rose 3.8% year-over-year in the week and container volume rose 3.3%, indicating perhaps that shipments from domestic sources are more than making up for weak volume at the west coast ports that get much of their traffic from China and the rest of Asia.

Passenger carriers are probably bracing for a slow quarter and hoping for the best. But until consumers become more confident in the economy, passenger traffic is very likely to remain depressed.

Paul Ausick

The initial public offering was 15,600,000 shares of common stock at $12.00 per share.  Proceeds from the offering to the company were put at roughly $171 million after removing the underwriting fees and commissions. 

Citigroup and Morgan Stanley were the joint book-runners; co-managers are Barclays Capital, Raymond James and Dahlman Rose & Company.  Certain selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 2,340,000 shares of common stock to cover overallotments, so if the deal gets a bump up you could have nearly 18 million shares in the float.

Where the disappointment comes into play today is that Spirit raised far less than expected.  The hope was for it to raise $300 million.  The deal was only about 60% of the original size. We were originally expecting 20 million shares to be sold in a range of $14 to $16 per share and that range was recently lowered down to $12 to $13 per share.

This pricing is hard not to call a disappointment.  Still, it has been about three years since any real airline made it public in an IPO.  This probably will not create a rush of private airlines hiring investment bankers.  It still may create a model for investment bankers and venture capital and private equity investors to re-evaluate new airline models for underserved markets.

JON C. OGG