Thursday, February 23, 2006

Columns: Brother, can you spare some room?

"It's A Wonderful Life" one of my favorite movies came out in 1946. According to Steve Huettel, writing in the St. Petersburg times, that was the last time airplane load factors were at 77.4%.

As Steve correctly states, the 77.4% number includes late night flights that are done for the primary purpose of positioning planes for the next days service. In other words, planes are flying as full as they ever have before.

Tomorrow morning, CAL will present at the JPM airline conference. I am looking forward to reviewing the conference at Continential's website. It would not take much to push CAL to new intermediate term highs. After that, the sky is the limit.

Yesterday, Bear Sterns upgraded US Airways, LCC, to a buy. The airline is growing traffic and reducing costs at the same time. The President of United has been talking about consolidation. While he believes that merging two airlines is a tough job, the savings are substantial. LCC is proving that to be the case. The company is ahead of projections to lower costs after the merger of American West and US Airways.

It is yet to be determined if DAL and NWAC can make it out of bankruptcy. Liquidations or mergers are possibilities.

There has been a lot of press about aircraft sales. India, China and other developing nations are buying most of the new planes. We are in a strong growth cycle. It will take several years for capacity to catch up with demand.

If you want to fly, you should book early and expect to be on a full plane. You should expect fares to rise substantially over the next three years.

CAL continues to win awards for being the best business class airline. The CAL check-in Kiosk are speeding customers through like never before. Customers can view the layout of the plane and change seats when there are empties available. Technology is lowering costs and improving service.

Inflation hawks such as Barry Ritholz just do not get it. They look at the price of gas and assume inflation is horrible. They don't appreciate all the many ways that costs are disappearing. It is easy to whine that the Kiosk eliminates jobs, but, we know, the savings will be recycled to produce other jobs in other areas. The lower costs will show up as greater margins for the airlines initially but eventually in lower ticket prices to the consumer.

>Ticket prices will not go down anytime soon because demand growth is faster than supply growth. Business travel demand is incredible. Never before have so many business folks traveled to as many countries. Direct flights from Chicago to India or China have become routine. The price of a first class seat is huge but relatively small to the trade deals being made.

The aggressive investor who puts a significant portion of his portfolio in legacy airline stocks just may hit a grand slam home run again and again over the next few years. Investors should note that legacy carriers are highly leveraged. The risk include the possibility of a terrorist attack. While the reality is that airline travel is unusually safe, the slightest hint of trouble could send the stocks on a roller coaster ride. It appears that the next move might be almost straight up!