Rising Airfares Are Not Good News For Airlines
August 24, 2010 by Douglas A. McIntyre
Airlines, which have made an art out of nickel-and-diming the public with new fees, are now raising fares. This is no time for investors to rejoice.
According to Reuters, Rick Seaney, chief executive of Farecompare.com, estimates,that fares for domestic flights are 16 percent to 20 percent higher than they were a year ago. The news service did not challenge Seany’s claim that “Demand is going to be pretty good this year for holiday travel because a lot of people forewent their trip last year.” Since joblessness remains above 9 percent and sales of existing homes plunged to a 15-year low, many people are probably avoiding taking expensive vacations this year too.
Airlines are getting a break on jet fuel prices since oil markets are trading down near $73.46 amid concerns about a slowing economy. That may not last. Analysts expect OPEC to restrict production if it falls well below $70, not a far-fetched premise. That would push crude prices up, which in turn would lead to higher jet fuel prices that could crush airline margins at the start of the busy holiday travel season. Oil demand also continues to rise. OPEC sees worldwide crude use rising by 1.2 percent to an average of 86.56 million barrels per day next year.
Some airline and travel stocks have soared lately as if they were immune from the sputtering recovery. UAL Corp. (NYSE:UAUA), parent of United Airlines, and US Airways Inc. (NYSE:LCC) are both up double digits as investors bet that the carriers would benefit from a merger. Priceline.com Inc. (NASDAQ:PCLN) has also been on a tear, soaring more than 28 percent in three months thanks to better-than-expected earnings. These are the exceptions, though, as most airline and travel stocks have posted declines.
If any of the pessimistic economic forecasts are even remotely correct, the travel industry will suffer and these outperformers will quit outperforming as well
–Jonathan Berr
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