Saturday, February 18, 2006


American Airlines recently added flights from Chicago to Delhi, India. It is not the only airline clamoring to get a piece of the sharp increase in demand. After years of retiring old equipment and cutting back on capacity, the airline industry suddenly does not have enough planes.

Boeing, AirBus and others are cranking up production lines but it will take years to satisfy the new international business travel demand. American companies among others suddenly have thousands of employees in India. The reasons to travel to India are growing while domestic travel within the country is booming. China is enjoying the same phenomenal growth.

I do not own Boeing and do not plan to buy shares. I think the stock will continue to do very well but I think the real leverage is in the legacy carriers. My favorite is Continental,(CAL), but American Airlines,(AMR), will do very well indeed.

The amazing thing about the Delhi flight from Chicago is that American Airlines,(AMR) was able to add it without adding a plane. The company, with the cooperation of the unions, was able to turn flights to and from London faster in order to squeeze one more flight into the mix.

Other examples of increased efficientcy abound. My favorite is that by eliminating one of the galleys, American , was able to add 4 seats per plane. It may sound like a small savings but multiply the number of flights per plane by the total number of planes and you get the equivalent of 10 extra planes flying; ten extra planes of revenue with no additional costs. Actually, if you add in the savings from not serving food on short flights, you have ten extra planes of revenue at a substantially reduced cost.

Note that international travel is the story. Southwest Airlines still has a market cap that is many times the market cap of AMR while the revenues of (AMR), far exceed the revenues of Southwest. This is an easy story! If you own LUV sell it! If you don't own CAL and AMR, buy them.

In full disclosure, my family owns CAL, AMR and LCC.