New Regulations Could Cause Further Weakness Among Airline Stocks

Brittney Barrett  |

2011 has been a tough year for airlines as the high price of oil drove up jet fuel costs and fares making it more difficult for people to fly. Companies across the sector have been struggling to negate the exorbitant price of jet fuel while still maintaining competitive flat fare rates. The most popular method to make up the difference has seemingly been to tack on fees for formerly complimentary services ranging from in-flight meals and entertainment to charging passengers for luggage. That will be more difficult to do after today following the government’s proposal that airlines provide greater detail on the ancillary costs collected from passengers as a means of promoting transparency.

The new regulations could impact airlines in two ways. They would prevent the application of certain fees potentially blocking a major source of revenue while simultaneously exposing a company’s pricing strategy to competitors. Last year alone, carriers took in $3.4 billion from baggage fees and $2.3 billion in reservation-change fees.

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The rules, according to the Department of Transportation, would require companies to report 16 categories of fee revenue as well as the reservation and luggage charges. Under present legislation, airlines report revenue from on-board sale of food, drinks, pillow, blankets and entertainment in one category and are unable to be identified individually.

Beyond the new reporting regulation, there will be heightened scrutiny on the manner that the needs of the disabled are being addressed by airlines. Disabled travelers have reported dissatisfaction with the way their assistance items have been handled inspiring the Department of Transportation to report the number of mishandled bags to the number of checked bags alongside the other new data.

Airline stocks were broadly in the red following the news, continuing a week long decline. Investors and analysts had worried that revenue growth has weakened ahead of the dampening economy. Earlier in the week UBS lowered its price target for JetBlue (JBLU) to $6.50 from $7 while maintaining a neutral rating on the stock.

Today, Southwest Airlines (LUV) reached a new 52-week low with 2.2 million shares traded. Shares are down over 15 percent for the year. Meanwhile Delta Air Lines Inc. is attempting to recoup lost cash by  dropping money-losing flights in 24 small cities. For many of the cities Delta’s decision puts them at risk of losing air access altogether. Delta says that it loses around $14 million annually on the flights, most of which are located in the Midwest.

The decision wasn’t enough to help shares today though as Delta (DAL) fell alongside US Airways (LLC), Jetblue (JBLU), Southwest (LUV) and Alaska Air (ALK)




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