What's Bad News for Frequent Fliers is Good News for Airline Stocks

Brittney Barrett  |

After a year of struggling with inflated jet fuel costs, up over 40 percent from the year prior as of the second quarter, airlines have begun to fight back. Shares of airlines, which tend to be among the first subsectors impacted by a weak economy, have been on a downward spiral for much of 2011. In the past several weeks though, the major U.S. carriers have been engaged in a discussion to reduce costs and return to high profitability. The conversation has ended, according to Tuesday’s reports in the decision to scale back domestic flights in the coming year in order to maintain the continued fare increases of 2011. The move to reduce flying seemed at first to be a way to increase flight volume and demand but according to the companies, the demand for flights has already returned to healthy levels.

While carriers struggled with profitability in the early part of the year and through the second quarter, the third quarter expectations indicate efforts to rectify losses were effective.

In addition to the higher price of fuel, many airlines were also afflicted by a crackdown on transparency into the added fees being tacked on to ticket prices. With these new rules to contend with, carriers seemed to be content to cut capacity into and beyond the fall.

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While this might be bad news for frequent fliers, it’s good news for airlines, many of which benefitted from a considerable boost following the announcement. Among the companies supporting the capacity restraints, were United Continental Holdings (UAL), Delta Air Lines Inc. (DAL) and Southwest Airlines Co. (LUV). All three carriers rose significantly in trading with Delta, the world’s second largest airline, experiencing the sharpest rise of the group. Delta's President indicated the company’s third quarter performance is surpassing expectations, crediting the rise with a largely unanticipated rise in demand and a $70 million revenue boost from suspended ticket-tax revenue from the period when the Federal Aviation Administration was shutdown.

United Continental, the largest U.S. carrier, rallied after detailing their own new profit strategy. United Continental intends to maintain domestic flights at their current levels, while offsetting any regional losses with a rise in international flying.

Southwest, which encountered problems beyond just the rise in jet fuel, including difficulties with its machinery that cost share prices significant value, experienced the most modest recovery of the three today.

The biggest winner in the sector in terms of a percentage rise, however, was U.S. Airways Group Inc. (LCC), which nearly doubled the gains of the next largest winner in the category. U.S. Airways’s President indicated September RASM, or revenue per available seat mile, for the company should be around 13 percent this month and assured investors of robust demand.

In addition to the listed companies, every single component of the airline subsector was up for the day.

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